IAS 40 Investment Property:

Question Bank
QUESTION 40-1 (7 MARKS)

Warner Bro’s Head office, where primarily administrative functions are performed, has achieved
good capital appreciation as it is situated in Los Angeles’s most sought after business district.
Walt Disney is running out of office space and approached Warner Bro’s to rent out one floor to
them (Warner Bro’s occupies the other 9 floors for administrative functions), which currently is
unoccupied. The remaining useful life of the Head office is 20 years.

REQUIRED:

Discuss in detail how Warner Bro’s should classify their Head office in terms of IAS 40 Investment
property.
QUESTION 40-1 (SUGGESTED SOLUTION)

Accounting classification of office building in terms of IAS 40 Investment properties

An investment property is defined as a property (land or a building, part of a building, or both) held:

- to earn rentals or for capital appreciation or both, rather than for

- use in the production or supply of goods or services or for administrative purposes, or
- sale in the ordinary course of business (par 5).

An owner-occupied property is a property held for use in the production or supply of goods or
services or for administrative purposes.

Application

The office building is:

- a land or building. ✓
- held for capital appreciation. ✓
- but is used for administrative purposes. ✓

The office building cannot be classified as investment property. ✓

In the case of the office building, the property is not held for the production or supply of goods or
services but is used for administrative purposes, thus owner-occupied. ✓

A portion of the building is used for administrative purposes, and therefore does not qualify as an
investment property. Another insignificant portion of the building is held to earn rentals (par 10). ✓
As these portions could not be sold separately, the property is not investment property as only ✓
an insignificant portion is held to earn rentals.
(7)
QUESTION 40-2 (15 MARKS)

Bugs and Babs Bunny are the co-owners of Warner Bro’s. Bugs and Babs have entered into many
lucrative business deals with Walt Disney, and have requested that you as their accountant help
them correctly classify and account for the following issues listed below. Warner Bro’s financial
reporting period is 31 December.

Warner Bro’s owns their film cameras. They were approached by Walt Disney to lease out their
film cameras to them as they were running short. Warner Bro’s considered this deal to be very
favourable and decided to lease out all film cameras to Walt Disney as they were no longer
utilizing the equipment in their now cartoon-only business. The remaining useful life of the film
cameras is 6 years.

REQUIRED:

Discuss the appropriate classification of the film cameras for Warner Bro’s in terms of IAS 40
Investment property and IAS 16 Property, plant and equipment. (Hint: Is it investment
property or property, plant and equipment?)
QUESTION 40-2 (SUGGESTED SOLUTION)

Accounting classification of film cameras (equipment) in terms of IAS 40 Investment

properties

An investment property is defined as a property (land or a building, part of a building, or both) held:
✓

- to earn rentals or for capital appreciation or both, rather than for ✓

- use in the production or supply of goods or services or for administrative purposes, or ✓
- sale in the ordinary course of business (par 5). ✓

Property, plant and equipment are tangible items that: ✓

a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purpose, and ✓

b) are expected to be used during more than one period. ✓

Application

The equipment is:

- not land and buildings. ✓

- used to earn rentals from Walt Disney (assumed not held for capital appreciation) ✓
- not held for sale in the ordinary course of business as the film cameras are just held idle. ✓

The equipment can not be classified as investment property. ✓

 The film cameras constitute property, plant and equipment ✓

as they are equipment (not property) ✓
held for rental to others ✓
and are expected to be used during more than one period. ✓

(15)
QUESTION 40-3 (18 MARKS)

On 1 October 2006 Commute (Pty) Ltd purchased a small exclusive boutique hotel in Rivonia at
R8 000 000. At that stage management classified the property as an investment property as
they argued that it differed too much from their normal operations, which is the rendering of
transport services to overseas visitors between Oliver Tambo International Airport and
surrounding cities.

The boutique hotel (where normal hospitality services are rendered) is very successful and
occupation remains consistent throughout the year due to its advantageous location close to the
Sandton CBD. At the end of the reporting period on 31 March 2007, the property was revalued
at R8 800 000 in terms of the fair value model. All employee-, service- and maintenance costs
were correctly expensed.

Commute (Pty) Ltd estimates the useful life of the boutique hotel at 8 years and does not intend
to use it for other purposes.

You are currently busy finalising the financial statements for the reporting year ended 31
March 2008 and you have some doubts regarding the accounting treatment adopted above.

REQUIRED:

a) Discuss the accounting classification (identification) of the boutique hotel in terms of the
requirements of IAS 40 Investment properties. (10)

b) Identify the treatment of the boutique hotel in 2007 terms of IAS 8 Accounting policies,
changes in accounting estimates and errors. (Supply the relevant definition). (3)

c) Supply the relevant journal entries to make the adjustment (for 2007) in the financial records
for the year ended 31 March 2008 in terms of IAS 8. (5)
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(18)
QUESTION 40-3 (SUGGESTED SOLUTION)

a) Accounting classification of boutique hotel in terms of IAS 40 Investment

properties

An investment property is defined as a property (land or a building, part of a building,

or both) held: ✓

- to earn rentals or for capital appreciation or both, rather than for ✓

- use in the production or supply of goods or services or for administrative ✓
purposes, or
- sale in the ordinary course of business (par 5). ✓

An owner-occupied property is a property held for use in the production or supply

of goods or services or for administrative purposes. ✓

In the case of the boutique hotel ‘normal’ hospitality services are rendered which
implies that the entity provides services to occupants of the property that is
significant to the arrangement as a whole, therefore the hotel is an owner occupied ✓
property (par 12).

Two further reasons are:

- that the property is not held for capital appreciation (assumed) ✓

- no operating leases are involved (par 8). ✓

The accounting treatment as investment property is incorrect. ✓

Should be treated as an owner-occupied property. ✓

In terms of IAS 16 the property should be depreciated annually. ✓

The property should be depreciated over an 8 year period (over which the asset is
expected to be available for use) on the straight line method (equal benefits (income
from occupation) derived over the useful life). ✓
12 limited to (10)

b) The treatment of the boutique hotel as an investment property instead of an

owner-occupied property is a prior period error in terms of IAS 8

Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more periods arising from a failure to use or misuse of reliable
information that: ✓

- was available when financial statements for those periods were authorized for
issue, and ✓

- could reasonably be expected to have been obtained and taken into account
in the preparation and presentation of financial statements (par 5). ✓
(3)
QUESTION 40-3 (SUGGESTED SOLUTION - CONTINUED)

c) Journals for adjustment or prior period error

2008
Mar Retained earnings - beginning of dr 500 000 ✓
year
Acc. Depr - boutique hotel cr 500 000 ✓
Correction of depreciation omitted
in 2007 (8 000 000/8 x 6/12).

Reversal of fair value adjustment dr 800 000 ✓

(P/L)
Property, plant and equipment dr 8 000 000 ✓
Investment property cr 8 800 000 ✓
Re-classification of boutique hotel
as owner-occupied property.
(5)
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(18)
QUESTION 40-4 (30 MARKS)

A Ltd owns the following property in Kramerville:

The property consists of two identical office buildings on adjoining, but separate sites, called building A and
building B. The cost price of each building was R4,5 million on 1 March 2018. Total legal costs and transfer
duties amounted to R800 000 to register both properties. A Ltd paid for the properties with excess cash
funds.

Building A is used as the company’s administration building. Building B is rented out to another company
at a rental of R50 000 per month.

A Ltd’s auditor advised the company that it should account for the properties in terms of the preferred
(benchmark) treatment of IFRS. The CEO of A Ltd has no idea what the auditor is talking about.

REQUIRED:

a) Briefly advise the CEO of A Ltd how the property/(ies) above should be accounted for in terms of
IFRS. (Ignore the land for the purpose of this question). (5)

The useful life of both buildings is estimated at 20 years and management is of the opinion that equal
benefits are derived from the use of the asset over its useful life. The accountant has estimated that the
amount that the entity would currently obtain from the disposal of a building (if the asset was already at the
end of its useful life), less the estimated costs of disposal, is R500 000 per building.

A sworn appraiser, who has experience with similar properties in the same area, has placed the following
fair value on the property at the following date:

28 February 2019 R4 800 000 each

REQUIRED:

b) Journalise the entries that need to be done in terms of the accounting treatment required by IFRS at
the end of the reporting period ended 28 February 2019. (Ignore rental income).
Indicate which element of the financial statements is affected by each entry (i.e. F/P, P/L, OCI).
Journal descriptions are not required. (9)

During the reporting period ended 28 February 2020 the following events/transactions took place:

On 1 June 2019 a major section of building A was destroyed in a fire due to an electrical short circuit. On
the following day the accountant estimated that the damaged building (in its current state) could only be
sold at R2 000 000 and that an estate agent would charge R175 000 to effect the sale. He also calculated
the value-in-use as R1 700 000, taking into account future cash flows.

By the end of the reporting period (28 February 2020) restoration costs totaling R1 100 000 had been
incurred to restore Building A, but the construction work had not been completed.

At 28 February 2020 the fair value of Building B was estimated at R4 100 000. The accountant reconfirmed
the residual value of Building B as R500 000, and estimated the remaining useful life at 1 July 2019 at 19
years.
REQUIRED:

c) Journalise the events/transactions that took place in the reporting period ended 28 February 2020
regarding the property/(ies).
Indicate which element of the financial statements is affected by each entry (i.e. F/P, P/L, OCI).
Journal descriptions are not required.
Show all calculations clearly.
Ignore tax implications. (25)
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(30)
QUESTION 40-4 (SUGGESTED SOLUTION)

a) Accounting treatment in terms of IFRS

In this case the property has a dual purpose as Building A is used for 
administration purposes and Building B is used to earn rentals (and presumably
for capital appreciation). The two buildings should be identified and accounted
for separately as they are separately saleable (separate sites).
Building A is an owner occupied property which is accounted for in terms of 
IAS 16. Building A should be accounted for by using the cost method, i.e. show
at cost price less accumulated depreciation and accumulated impairment losses.
Definition of owner occupied property - A property that is held for use in the 
production or supply of goods or services or for administrative purposes.
Definition of investment property - A property (land or a building, part of a 
building, or both) held to earn rentals or for capital appreciation or both, rather
than for use in the production or supply of goods or services or for administrative
purposes or for sale in the ordinary course of business.
Building B is an investment property and should be accounted for in terms of 
IAS 40. Building B should be accounted for by using the fair value method, i.e.
measure at fair value at each reporting date and recognise fair value differences
in profit or loss.
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(5)

b) Journals for the reporting period ended 28 February 2019

Property A

1/3/2018 800 000 dr 4 900 000✓

Property (4 500 000 + ) (SFP) ✓
2
8,23%
Bank (FP) cr 4 900 000
Recognition of owner-occupied property and
capitalisation of transaction costs.
28/2/2019 Depreciation - property dr 220 000✓
((4 900 000 - 500 000)/20) (P/L)
Accumulated depreciation (FP) cr 220 000✓
Recognition of depreciation according to
straight line method for 2019.
Property B
1/3/2018 Investment property
800 000
(4 500 000 + ) (SFP) ✓ dr 4 900 000✓
2
8,23%
Bank (FP) cr 4 900 000
Recognition of investment property and
capitalisation of transaction costs.
28/2/2019 Fair value adjustment (P/L)✓ dr 100 000✓
Investment property (FP) ✓ cr 100 000
Fair valuation of investment property at the
reporting period.

If no amounts are given, entries are not marked. (9)

QUESTION 40-4 (SUGGESTED SOLUTION - CONTINUED)

c) Journals for the reporting period ended 28 February 2020

Property A
1/6/2019 Depreciation (P/L) - property✓ dr 55 000
Accumulated depreciation (FP) cr 55 000
Recognition of depreciation for 3 months
until fire (4 900 000 - 500 000/20 x 3/12) on
Building A.
Impairment loss (P/L)✓ dr 2 800 000
Accumulated impairment loss (FP)✓ cr 2 800 000
Impairment of Building A to recoverable
amount.
28/2/2020 Property (FP) dr 1 100 000✓
Bank/Payables (FP) cr 1 100 000
Capitalisation of restoration costs on
Building A.
Depreciation - property (P/L)✓ dr 133 333
Accumulated depreciation (FP) cr 133 333
Recognition of depreciation on owner-
occupied property (Building B).
(4 300 000 - 500 000/19✓) x 8/12.✓
Depreciation (P/L)✓ dr 73 000
Accumulated depreciation (FP)✓ cr 73 000
Recognition of depreciation on remainder
of Building A. (1 825 000/225 x 9).
Fair value adjustment (P/L) ✓ dr 700 000✓
Investment property (SFP) cr 700 000
Fair valuation of investment property at the
reporting period

NB -The fair value of Building B at 28/2/2020 is irrelevant as it is no (16)

longer an investment property that should be fair valued.
Calculation:
CA = 4 900 000 - 220 000 - 55 000 = 4 625 000
FV less costs to sell = 2 000 000 - 175 000 = 1 825 000
Value in use = 1 700 000
Recoverable amount is higher of FV less cost to sell and Value-in-use
 1 825 000 > 1 700 000
= 1 825 000

 Impairment loss = CA - RA
= 4 625 000 - 1 825 000 (If calculated )
= R2 800 000
(30)___