Industry specific standards

Question 1

IAS 40 Investment Property

Answer 1

Rental, Capital appreciation or Undetermined use

‘Investment property is property (land or a building – or part of a
building – or both) held (by the owner or by the lessee as a rightof-use asset) to earn rentals or for capital appreciation or both.’ (IAS 40, para 5)
Note that land held for undetermined future use is assumed to be held for capital appreciation and hence is classified as investment property.

The following are examples of properties that fall outside the scope of IAS 40 Investment Property:

Property intended for sale in the ordinary course of businessIAS 2 Inventories

Property being constructed or developed on behalf of third parties IFRS 15 Revenue from contracts with customers

Owner-occupied propertyIAS 16 PPE

Property leased to another entity under a finance lease (lessor accounting)IFRS 16 Leases

Question 2

IAS 40 Investment Property Treating only part of a property as an investment property

Answer 2

It may be possible to treat only part of a property (e.g. 2 out of 5 floors) as an
investment property, if these different parts can be separated (i.e. sold separately or
leased separately under a finance lease). The remaining portion would be treated as
PPE.

Question 3

IAS 40 Investment Property Ancillary services

Answer 3

If an entity offers additional services to the occupants of its property, then the
property should be treated as an investment property only if those services are
insignificant to the whole arrangement e.g. security and maintenance.

If those services are significant then the property is not an investment property and
should be classified as owner-occupied (PPE). Whether such services are significant
is a judgement call – IAS 40 gives the example of services offered by a hotel to its
guests.

Question 4

IAS 40 Investment Property 1.1 Recognition and initial measurement

Answer 4

COST, including transaction costs

‘An investment property shall be measured initially at its cost.
Transaction costs shall be included in the initial measurement.’
(IAS 40, para 20)
 Transaction costs would include items such as professional fees and stamp
duty.

Question 5

IAS 40 Investment Property 1.2 Subsequent measurement

Answer 5

An entity has a choice of subsequent measurement, but once
chosen must apply the policy consistently to all investment
properties.

The subsequent measurement is either:
 The cost model – as per IAS 16 Property, Plant and Equipment, recognise at:
– Cost less depreciation less impairment losses, but
– The fair value still needs to be disclosed.
 The fair value model
– Measure at fair value at the reporting date
– Do not recognise any depreciation
– Gains or losses during the period are recognised in profit or loss

Question 6

IAS 40 Investment Property 1.3 Derecognition

Answer 6

When an investment property is derecognised, gains or losses go to the profit or loss
account.

Question 7

IAS 40 Investment Property 1.4 Change in use

Answer 7

A change in use may mean a property begins or ceases to be classified
as an investment property. Examples of such changes include:
(a) commencement of owner‑occupation, or of development with
a view to owner-occupation, for a transfer from investment
property to owner‑occupied property
(b) commencement of development with a view to sale, for a
transfer from investment property to inventories
(c) end of owner‑occupation, for a transfer from owner‑occupied
property to investment property, and
(d) inception of an operating lease to another party, for a transfer
from inventories to investment property. (IAS 40, para 57)
Note: the treatment of leases by lessors is dealt with in Chapter 10.
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 the fair value model, restate to fair value and
then reclassify: *

– Transfers from investment property to PPE: restate to fair
value under IP treatment, so movement goes to profit or loss
– Transfers from investment property to inventories: the FV
of the investment property becomes the deemed cost of the
inventory
– Transfers from PPE to investment property: restate to fair
value under PPE treatment, so movement goes to OCI
– Transfers from inventories to investment property: restate
to fair value and recognise any gain or loss in the statement
of profit or loss.

Question 8

IAS 41 Agriculture

Answer 8

IAS 41 Agriculture sets out the accounting treatment of agricultural activity.
IAS 41 has a D syllabus weighting which means only an awareness is
required.
There are 3 key issues:
 Definitions
 Recognition and measurement
 Government grants.

Question 9

IAS 41 Agriculture Definitions

Answer 9

Biological assets -> Agricultural produce
(Bearer biological assets = e.g. Grape vines)

‘Agricultural activity is the management by an entity of the
biological transformation and harvest of biological assets for
sale or for conversion into agricultural produce or into
additional biological assets.
 Agricultural produce is the harvested produce of the entity’s
biological assets.
 A biological asset is a living animal or plant.
 Biological transformation comprises the processes of growth,
degeneration, production, and procreation that cause
qualitative or quantitative changes in a biological asset.’ (IAS
41, para 5)
 Agricultural produce – the harvested produce of biological
assets.
 Bearer biological assets – these are plant-based biological
assets which grow crops over several periods and are not
themselves consumed. Examples include grape vines or apple
trees.

Question 10

IAS 41 Agriculture 2.1 Recognition and measurement

Answer 10

‘An entity shall recognise a biological asset or agricultural
produce when, and only when:
(a) the entity controls the asset as a result of past events
(b) it is probable that future economic benefits associated with
the asset will flow to the entity, and
(c) the fair value or cost of the asset can be measured reliably.’
(IAS 41, para 10)

Question 11

IAS 41 Agriculture Biological assets

Answer 11

Bearer biological assets are accounted for as PPE under IAS 16 Property, Plant and
Equipment. For all other biological assets use the following guidance from IAS 41
Agriculture.
Initial measurement is at:
 Fair value less any estimated ‘point of sale’ costs
 If there is no fair value then use the cost model.
Subsequent measurement
 Any changes to fair value at the reporting date should be taken to profit or loss.

Question 12

IAS 41 Agriculture Agricultural produce

Answer 12

Initial measurement is at fair value less any estimated ‘point of sale’ costs.
 Subsequent measurement is by reference to IAS 2 Inventories

Question 13

IAS 41 Agriculture Government grants

Answer 13

Grants received in relation to biological assets can be:
 Unconditional – recognise as income immediately
 Conditional – recognise when the attached conditions are met. Part-recognition
may be possible if only some of the conditions are met.

Question 14

IFRS 6 Exploration for and
Evaluation of Mineral Resources

Answer 14

IFRS 6 Exploration for and Evaluation of Mineral Resources deals with expenditure
on the exploration and evaluation of mineral resources such as: gold, copper, oil and
gas.
IFRS 6 has a D syllabus weighting which means only an awareness is
required

Question 15

IFRS 6 Exploration for and
Evaluation of Mineral Resources 3.1 Classification

Answer 15

Exploration and evaluation assets must be classified as tangible or intangible
assets according to their nature.
Development costs of mineral resources are not considered by IFRS 6 Exploration
for and Evaluation of Mineral Resources but by IAS 38 Intangible Assets.

Question 16

IFRS 6 Exploration for and
Evaluation of Mineral Resources 3.2 Measurement

Answer 16

At recognition, initial measurement is at cost.
Entities must decide which costs to recognise and apply their policy
consistently, such costs include:
(a) acquisition of rights to explore
(b) topographical, geological, geochemical and geophysical
studies
(c) exploratory drilling
(d) trenching
(e) sampling, and
(f) activities in relation to evaluating the technical feasibility and
commercial viability of extracting a mineral resource.’ (IFRS 6,
para 9)
Subsequent measurement is considered by applying the cost model or
the revaluation model per IAS 16 Property, Plant and Equipment or IAS
38 Intangible Assets.

Question 17

IFRS 6 Exploration for and
Evaluation of Mineral Resources 3.3 Impairment

Answer 17

The factors that may indicate that the carrying amount of exploration and evaluation
assets exceeds the recoverable amount are:
 Exploration rights have expired
 No success in finding commercial viability
 Estimates suggest that the carrying amount cannot be recovered.
The ‘carbon bubble’ – this term describes the difference between the expected value
of known fossil fuel reserves and the value of those fossil fuels that climate change
policy means can be extracted.
It is currently expected that 90% of known fossil fuels will have to remain in the
ground (referred to as physically stranded assets), and as a result significant
numbers of associated exploration and evaluation assets may be impaired.

Question 18

IFRS 17 Insurance Contracts

Answer 18

IFRS 17 has a C syllabus weighting which means you only require a
general knowledge with a basic understanding of the subject matter
sufficient to identify significant issues and evaluate their potential
implications or impact.

Question 19

IFRS 17 Insurance Contracts Definition

Answer 19

Insurance contracts –
‘A contract under which one party (the issuer) accepts significant
insurance risk from another party (the policyholder) by agreeing to
compensate the policyholder if a specified uncertain future event
(the insured event) adversely affects the policyholder.’
(IFRS 17, Appendix)

Question 20

IFRS 17 Insurance Contracts 4.1 Measurement models

Answer 20

There are two measurement models for insurance contracts:
 Premium allocation approach (PAA) – used for non-life short term contracts
 General measurement method (GMM) – used for contracts with terms greater
than a year (e.g. life insurance and annuities).

Question 21

IFRS 17 Insurance Contracts 4.2 Premium allocation approach (PAA)

Answer 21

Initial recognition and measurement
Recognise a liability, measured at:
Premiums received/receivable – acquisition costs paid/payable
Subsequent measurement
At the end of the year, the amount of the liability that related to the current year is
released to the SPL using the following journal:
Dr Insurance liability
Cr Revenue
The liability must also reflect any claims that were incurred before the year end but
not yet paid.

Question 22

IFRS 17 Insurance Contracts 4.3 General Measurement Method (GMM)

Answer 22

Initial recognition and measurement
The insurer will determine:
– the estimated cash inflows (i.e. premiums)
– less the estimated cash outflows (e.g. claims, acquisition costs etc.)
adjusted for the time value of money (i.e. discounted to PV) and the risk inherent in
estimated cash flows on long term insurance products.
This amount represents the profit expected over the life of the contract (known as the
Contract Service Margin).
If the contract is expected to be profitable a ‘nil’ balance is recognised (i.e. the profit
is deferred). If the contract is expected to be loss-making then it is an onerous
contract and a liability is recorded for the full loss.
Subsequent measurement
Insurance contracts are remeasured at each subsequent year end and a proportion
of contractual service margin is released to profit or loss.

Question 23

Audit and assurance implications of
investment properties: Audit tests

Audit risks

Classification as investment
property

Answer 23

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.

Question 24

Audit and assurance implications of
investment properties: Audit tests

Audit risks

 Correct valuation

Answer 24

 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.