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IAS 16 and IAS 40(International Accounting Standards) - Essay Example

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IAS 16 and IAS 40(International Accounting Standards)

How will Gale plc determine whether the building is an investment property or not? As per the presented information, it is hard to determine whether the building is an investment property. This is due to the fact that, according to the definition presented by IAS 40 in website, an investment property refers to such property that includes buildings and land or part of such that is either held by the legal owner or lessee for the purpose of earning rentals or for the reasons of achieving appreciation of capital or even both. Examples of such property are with the inclusion of land that is held for the prospected use in indefinite future or for the purposes of its appreciation in value, a building being leased under the type of lease known as operating lease or even any given property that has been developed or constructed for future utilisation as an investment property. Therefore, owner occupied property that is being held for future disposal does not really fall under investment properties. (, 2011) (b) After initial recognition, describe the accounting treatment that should be adopted for a building in accordance with IAS16, assuming it is not an investment property? IAS 16, as Holt writes, deals with (PPE) Plant, Property and Equipment. The definition put across by IAS 16 with regards to Plant, Property and Equipment is any tangible type of asset which any given entity may hold for rental purposes or for own use and which the same entity expects to utilise for more than a period. This PPE could have been either constructed or bought by the reporting entity. Any item falling under PPE has to be recognised by the reporting entity as an asset. In case the future benefits as well as losses that are expected from the asset can be reasonably quantified, then the item of PPE should be taken in the books of the entity as an asset. PPE, in accordance to IAS 16, is originally recognised in the books at the cost of the item and this is the fair value of the price paid to obtain the asset. The costs that have been incurred in the process of having the asset in its condition of working should be capitalised as the IAS states. These cost outlays may be with the inclusion of architects’ fee in the case of a building. If applicable directly attributable types of overhead costs as well as borrowing costs should form part of the costs. During the stage of production, all earned revenues should form part of the incomes in the income statement as opposed to capitalising the same. Following the initial recognition of such an asset that falls under PPE, like in this case- a building, the given asset should be valued at cost minus any accumulated depreciation or at the amount of revaluation, which is the fair value of the asset minus depreciation. Note that in the case of fair value, such must be reliably measured. There should be subsequent revaluations with enough regularity to allow for the carrying amount to be in the whereabouts of the fair value. Revaluation may bring about a surplus or a deficit and this, according to IAS 16 should be included in the retained earnings. In case of depreciation, the depreciable amount is to be allocated using a systematic way over the useful life of that asset, (in this case the building). (Holt, 2010) (c) After initial recognition, describe the accounting treatment that should be adopted for an investment property in the accounts according to IAS 40? In the process of accounting for property, be it buildings, land or parts of buildings, is to classify such in accordance to IAS 40. If such assets are for capital appreciation or rental purposes as opposed to supply or production of commodities, not intended for disposal or for administration then these should be reclassified from Property, Plant and Equipment to property for investment if such is deemed essential. (Wittsiepe, 2008 p133) An investment property shall be accounted for in the accounts as an asset only under the situation that; there can a reasonable way to ...Show more
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How will Gale plc determine whether the building is an investment property or not?As per the presented information,it is hard to determine whether the building is an investment property.This is due to the fact that,according to the definition presented by IAS 40 in website,an investment property refers to such property that includes buildings …
IAS 16 and IAS 40(International Accounting Standards)
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