Nothing is of Lesser
importance
By: Muhammad Saad Riaz (ACCA)
In June 2013 Paper F7 – Financial Reporting Exam, examiner commented about poor performance on questions
5, addressing IAS 40 – Investment properties due to poor coverage of the syllabus and many candidates left this
question unanswered. This article will consider a summary of various small IAS’s that are relevant to Paper F7.
IAS 40 – Investment Properties
IAS 40 Investment Property applies to the accounting
for land and/or buildings held to earn rentals and/or for
capital appreciation. Investment property appears as
an asset in statement of financial position.
IAS 40 permits entities to choose between:
 fair value model, and
 cost model.
One method must be adopted for all of an entity's
investment property.
Under Fair value model, which is different than
revaluation model of IAS 16, Investment property is
remeasured at fair value. Gains or losses arising from
changes in the fair value of investment property must
be included in net profit or loss for the period in which
it arises. Unlike IAS 16, this implies NO depreciation and
NO revaluation reserve.
Cost model is as set under IAS 16 Property, Plant and
Equipment i.e. cost less accumulated depreciation and
less accumulated impairment losses.
June 2013 Exam 5(b) required preparing extracts, for
statement of profit or loss (PNL) and other
comprehensive income (OCI) and statement of financial
position (SOFP), for two properties:
Question – Property A:
An office building used by Speculate Co. for
administrative purposes with a depreciated historical
cost of $2 million. At 1 April 2012 it had a remaining life
of 20 years. After a reorganisation on 1 October 2012,
the property was let to a third party and reclassified as
an investment property applying Speculate’s policy of
the fair value model. An independent valuer assessed
the property to have a fair value of $2·3 million at 1
October 2012, which had risen to $2·34 million at 31
March 2013.
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Solution:
This property will be treated under IAS 16 till 30th
September, 2013 and then will be transferred to IAS 40
as an investment property
(All workings in $’000)
PNL Extract:
Depreciation of office building (2,000/20 years x 6/12)
= (50)
Gain on investment properties: (2,340 – 2,300) = 40
OCI Extract:
Revaluation Gain (2,300 – (2,000 – 50)) = 350
SOFP Extract:
Non-current assets
Investment properties = 2340
Equity
Revaluation reserve (as above) = 350
Question – Property B:
Another office building sub-let to a subsidiary of
Speculate. At 1 April 2012, it had a fair value of $1·5
million which had risen to $1·65 million at 31 March
2013.
Solution:
PNL Extract:
Gain on investment properties: (1,650 – 1,500) = 150
SOFP Extract:
Non-current assets
Investment properties = 1,650
IAS 23 – Borrowing Cost
IAS 23 Borrowing Costs requires that borrowing costs
directly attributable to the acquisition, construction or
production of a 'qualifying asset' are included in the
cost of the asset. Other borrowing costs are recognised
as an expense.
A qualifying asset is one that necessarily takes a
substantial period of time to get ready for its intended
use or sale.
Borrowing costs include interest based on its effective
rate on borrowing. They may be based on specifically
borrowed funds or on the weighted average cost of a
pool of general borrowings.
Keep following points in your mind:
 The finance cost of the loan must be calculated
using the effective rate.
 Capitalization commences from when expenditure
is being incurred.
 Capitalization must cease when the asset is ready
for its intended use.
 Interest cannot be capitalised during a period
where development activity is suspended.
 Interest earned from the temporary investment of
specific loans should be deducted from the amount
of finance costs that can be capitalised, ONLY in the
periods in which the finance costs are being
capitalised.
June 2010 Exam 5(b) required the candidates to
calculate the net borrowing cost that should be
capitalised and the finance cost that should be reported
in the income statement
Question
Apex issued a $10 million unsecured loan with a coupon
(nominal) interest rate of 6% on 1 April 2009. The loan
is redeemable at a premium which means the loan has
an effective finance cost of 7·5% per annum. The loan
was specifically issued to finance the building of the
new store which meets the definition of a qualifying
asset in IAS 23. Construction of the store commenced
on 1 May 2009 and it was completed and ready for use
on 28 February 2010, but did not open for trading until
1 April 2010. During the year trading at Apex’s other
stores was below expectations so Apex suspended the
construction of the new store for a two-month period
during July and August 2009. The proceeds of the loan
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were temporarily invested for the month of April 2009
and earned interest of $40,000.
Solution:
The finance cost of the loan must be calculated using
the effective rate of 7·5%, so the total finance cost for
the year ended 31 March 2010 is $750,000 ($10 million
x 7·5%). As the loan relates to a qualifying asset, the
finance cost (or part of it in this case) can be capitalised
under IAS 23.
remaining four-month finance costs of $250,000 must
be expensed. IAS 23 also says that interest earned from
the temporary investment of specific loans should be
deducted from the amount of finance costs that can be
capitalised. However, in this case, the interest was
earned during a period in which the finance costs were
NOT being capitalised, thus the interest received of
$40,000 would be credited to the income statement
and not to the capitalised finance costs.
In summary:
The Standard says that capitalisation commences from
Income statement for the year ended 31 March 2010:
when expenditure is being incurred (1 May 2009) and
must cease when the asset is ready for its intended
use
Finance cost (debit) ($250,000)
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(28 February 2010); in this case a 10-month period.
Investment income (credit) $40,000
However, interest cannot be capitalised during a period
where development activity is suspended; in this case
Statement of financial position as at 31 March 2010:
the two months of July and August 2009. Thus only
Property, plant and equipment (finance cost element
eight months of the year’s finance cost can be
only) $500,000
capitalised = $500,000 ($750,000 x 8/12). The
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