LU4 - Fair value, PPE & Investment Property

Question 1

Fair value - Definition

Answer 1

Price that would be received to sell an A or assume L in an orderly txn between market participants at the measurement date. (Exit Price!)

Question 2

Fair Value - Possible markets and their definitions

Answer 2

Principal Market - Highest volume and level of activity
Most advantageous market - Higher net proceeds

Question 3

Fair Value - Which market is first option for FV and when do we only go to the next market?

Answer 3

Principal market is always first option and then in the absence of PM we go to Most Advantageous Market.

Question 4

Fair Value - Give me the 4 key points related transaction costs and transport costs in relation to determination of FV.

Answer 4

1.When calculating FV, exclude TC! include TP!
2.When assessing MAM, include both TC & TP!
3.If location is a characteristic of the A, then price in PM is adjusted for TP.
4.Remember even in the MAM, once calculating highest net proceeds -you still have to deduct TP

Question 5

Fair Value - Of future contracts. There’s cost, TC, quoted sales price and TC of selling. What’s your FV?

Answer 5

EXIT PRICE!!! The price we can sell the asset !!! We only take into consideration TP if its there.

Question 6

fair value- Highest and Best Use definition

Answer 6

The FV of an A will be the highest and best use that market participants would use the asset for, doesn’t matter what you’re using for.

In determining if restrictions placed upon it will affect our calc, the most important q is does the restriction apply only to you or ALL MARKET PARTICIPANTS???

Question 7

Fair Value - Calculation? With Highest & Best Use Definition

Answer 7

Highest & Best Use -Conversion costs !!! Unlike normal FV calc where we exclude tc

Question 8

Investment Property - Definition?

Answer 8

L&B held by owner/lessee under finance lease to earn rentals or for capital appreciation or both.

Question 9

Investment Property - Recognition criteria (2 of them)

Answer 9

1.IP should be recognized as an asset when it is probable that the future economic benefits that are associated with the property will flow to the entity.
2. Cost of the property can be reliably measured.

Question 10

Investment property -
1. When can you split recognition into PPE & IP?
2.If criteria for the above was not met what are conditions in which its IP or full PPE?
3. When can you recognize as IP and when not ?

Answer 10

Dual Purpose
*IAS permits splitting properties between PPE and IP ONLY if parts used for different purposes could be:
1.Sold separately or
2.Leased out separately under a finance lease.

**If the portions could not be sold separately, the property is IP only if an insignificant portion is held for Admin/Production of good & services.

Extent of ancillary services
*An Owner-managed hotel is owner occupied property, rather than IP because the services provided to guests are significant to the arrangement as a whole.

If services are insignificant, like only providing security for the above mentioned hotel then only can be treated as IP.

Question 11

Investment Property - IAS 16 & 40 implications when asset has more than one use. (2 of them)

Answer 11

1. Partial Own Use/Dual purpose - If owner occupies insignificant portion apply IAS 40 to everything. If the owner occupies a significant portion, the q is can those parts be sold separately? If yes then you account for via IAS 16&40 as per occupied space. IF no, PPE!
2. Ancillary services - Insignificant Ancillary services =IAS 40
   Significant Ancillary services = IAS 16

Question 12

Investment Property - Transfers from/to IP should only happen when there is a change in use, 4 criteria:

Answer 12

1. End of owner occupation
2. Inventory change of use to IP
3. Property becomes owner-occupied
4. Commencement of development with view to sell.