Chapter 8 Industry specific standards Flashcards
1.1 IAS 40 Investment Property
Investment property is property held to earn rentals or for capital appreciation or both. Property falling outside of the IAS 40 scope include: intended for sale in ordinary course of business (IAS 2 Inventories), constructed or developed on behalf of third parties (IFRS 15), owner-occupied property (IAS 16) and property leased to another entity under a finance lease (IFRS 16 leases).
A property can be partly treated as an investment property and separated to be accounted for partly an investment property and the other part as PPE.
An investment property is measured at initially at cost including transaction costs. Subsequently an entity has a choice of measurement, this then applies to all investment properties. This is either cost model (cost less depreciation and impairment losses but the FV needs to be disclosed) and the FV model (measure at FV of reporting date, do not recognise depreciation, gains or losses are recognised in P+L).
When an investment property is derecognised, gains/losses go to P+L.
1.2 Change in use
A change in use means a property begins or ceases to be classed as an investment property. The accounting treatment is determined by the investment property model applied:
- If IP is held under the cost model, transfer at carrying amount
- If IP is held under FV model, restate to fair value and then reclassify. If to PPE restate the FV under IP treatment and movement goes to P+L. If to inventories, the FV of property becomes the deemed cost of inventory. If PPE to IP, restate to FV under PPE treatment, movement to OCI. If inventory to IP, restate to FV and recognise any gain/loss to P+L
2.1 IAS 41 Agriculture
This is the management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into produce or into assets. Any entity recognises a biological asset or produce when the entity controls the asset as a result of past events, it is probable that future economic benefits with flow to the entity and the FV or cost of the asset can be measured.
Biological assets are accounted for as PPE. Initial measurement is at FV less any estimated point of sale costs. If there is not FV the use cost model. Any changes to FV at reporting date is taken to P+L.
Agricultural produce: initial measurement is at FV less any estimated point of sale costs. Subsequent measurement is by reference to IAS 2.
Grants received in relation to biological assets can be unconditional (recognise income immediately) or conditional (recognise when conditions are met, part-recognition is possible).
3.1 IFRS 6 Exploration for and evaluation of mineral resources
This deals with expenditure on the exploration of mineral resources. Exploration and evaluation assets must be classified as tangible or intangible. Development costs of mineral resources are not considered by IFRS 6. At recognition, initial measurement is at cost. Entities must decide which costs to recognise and apply their policy consistently (costs include acquisition of rights to explore, trenching, exploratory drilling, sampling etc).
Subsequent measurement is considered by applying the cost model or revaluation model.
Factors indicating impairment include exploration rights have expired, no success in finding commercial viability and estimates suggest the carrying amount cannot be recovered.
4.1 IFRS 17 Insurance contracts
Insurance contract is a contract under which one party accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. There are two measurement models:
- Premium allocation approach: used for non-life short term contracts
- General measurement method: used for contracts with terms greater than a year
4.2 Premium allocation approach
Initially recognise a liability measured at the premiums received/receivable less the acquisition costs. Then at the year end, the amount of liability that related to the current year is released to the SPL using: Dr Insurance liability Cr Revenue. The liability must also reflects any claims incurred before the year end but not yet paid.
4.3 General measurement method
Initial recognition is based on the estimated cash inflows (premiums) less the estimated cash outflows (claims etc). this is adjusted for the time value of money and the risk inherent in estimated cash flows on long term products. This represents the profit expected over the life of the contract. If the contract if expected to be profitable a nil balance is recognised, if loss-making then it is an onerous contract and a liability is recorded for the full loss.
Insurance contracts are remeasured at each subsequently year end and a proportion of contractual service margin is released to profit or loss.
5.1 Audit and assurance implications of investment properties
Audit risks Audit tests
Classification as investment property Check that the property meets the definition of investment property by reviewing lease agreements with lessees. Inspect lease contracts to determine extent of ancillary services. Review lease agreements with lessees for properties that are held in PPE but should be IP. Review lease rental income account and check whether the properties are appropriately classified. Review board minutes for discussion of changes in property usage. During inventory count and PPE inspection, identify any properties that are being used by third parties and consider classification as IP instead.
Correct valuation Check accounting policy (cost or revaluation model) followed. Agree fair value to valuer’s report or other supporting evidence such as market prices for similar property.
