FAR270 MFRS140 TEST Solution PDF

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TEST FARSUGGESTED SOLUTIONMFRS 140 INVESTMENT PROPERTYSOLUTION OCTOBER 2019a. The vacant land is an asset of BMF Bhd because it is a present economic resource controlled by BMF Bhd as a result of past event (acquired on 1/7/18). The land is currently held at the company’s discretion (right to use an...

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TEST FAR270 SUGGESTED SOLUTION MFRS 140 INVESTMENT PROPERTY

SOLUTION OCTOBER 2019 a.

The vacant land is an asset of BMF Bhd because it is a present economic resource controlled by BMF Bhd as a result of past event (acquired on 1/7/18). The land is currently held at the company’s discretion (right to use and controlled by the entity). The land also has the potential to produce economic benefits to the company from its increase in value.

b.

The land should be classified as an IP (MFRS140) . Although BMF Bhd has not decided what to do with the land, it is regarded as being held for capital appreciation. MFRS 140 Investment Property states that land held for undetermined future use is an IP where the entity has not decided that it will use the land as owner-occupied property or for short term sale.

c.

For the land to be recognised in the SOFP, it needs to meet the definition of asset i.e. IP. In addition, the land will only be recognised if its recognition provides users with information about the land that is both relevant and faithfully represented (reliably measured and certain).

a.

Initial costs of property:

A.

b.

Purchase price

RM2,000,000

Property transfer taxes

RM50,000

Legal costs

RM10,000

Total

RM2,060,000

On 1 July 2017, the property can be classified as IP because it has been leased out to Fishery Bhd under an operating lease. It shall be recorded at RM2,060,000 on its initial recognition. At the end of the year 2018, the difference of RM140,000 (between the fair value of RM2,200,000 and carrying value of RM2,060,000) is recognised as a gain in the statement of profit or loss. The property is not depreciated .

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c.

Journal entries: 30/6/19 Bank SOPL (rental income) SOPL - FV Loss (2,200,0002,180,000) IP

192,000 192,000

20,000 20,000

d. Carrying amount = RM2,180,000 SOLUTION APRIL 2019 A. 1. Investment property. 2. Investment property. 3. Not investment property. 4. Not investment property. a.

Investment property is defined as property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: a) Use in the production or supply of goods or services or for administrative purposes or b) Sale in the ordinary course of business

b.

The building is used for rental (90%) and administration (10%). If these portions can be sold separately, then each portion can be classified separately . Meanings, part that has been rented out will be classified as investment property while part that is used for administration will be classified as owner-occupied property . If these portions cannot be sold separately , then the whole building will be classified as investment property if the part that is owner-occupied is insignificant . So, since the building is used 90% for renting, it can be classified as investment property .

c.

MFRS 140 stated that Land held for undetermined future use is classified as investment property .

d. Purchase price Legal Fees Initial costs

Building 250,000 10,000 260,000

Land 40,000 5,000 45,000 2

SOLUTION OCTOBER 2018

A.

The building is an asset of Nabalu Bhd because it is a present economic resource controlled by Nabalu Bhd as a result of past event (it was bought on 1 January 2017). The building is let out to tenant at the company’s discretion (right to use and controlled by the entity). With the building, Nabalu Bhd will be able to generate rental income (potential to produce economic benefits to the company). b. The whole property the entire building can be classified as an investment property since the property could not be sold separately and significant portion (10/14) are let out to tenants whereas the owner occupied portion is insignificant

d. Recognition criteria: For the building to be recognised in the statement of financial position, it needs to meet the definition of Investment Property. In addition, the building will only be recognised if its recognition provides users of the financial statements with information about the building that is both relevant and faithfully represented (ie meets the qualitative characteristics of useful information). d. Initial costs: Purchases price Less: Trade discount 2% Legal fees Property transfer tax Total

B. a.

RM28,000,000 (RM560,0000) RM100,000 RM 90,000 RM 27,630,000

Accounting treatment: The building is classified as an investment property as per MFRS 140 Investment Property on 1 January 2016 at the initial cost of RM11,700,000. On 31 December 2016, carrying amount of the building RM11,700,000 is compared to fair value of RM12,500,000 resulted in gain on valuation of RM800,000 credited to SOPL. On 31 December 2017 carrying amount of the building RM12,500,000 is compared to fair value of RM12,000,000 resulted in loss of RM500,000 write off in SOPL. The building will not be depreciated.

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b. The extract statement of profit or loss for the year ended 31 December 2016 2017 (+) Other income: RM RM Gain on FV of IP 800,000 Rental income 700,000 700,000 (-) Expenses: Loss on FV of IP

500,000

SOLUTION MAY 2018

a.

MFRS 140 defines investment property as ‘land or a building or (part of building or both) held by the owner to earn rentals or for capital appreciation or both, and not for use in the production or supply of goods or services or for administrative purposes, or sale in the ordinary course of business.

b.

The Homestay Property- North Wing can be recognised as an IP under MFRS140 as at 1 April 2017 since it has been rented out and the ancillary services provided by the Beat Three Bhd to the tenants of the homestay property, are insignificant to the arrangement as a whole (the rental income received of RM800,000 per month (RM9,600,000 per annum) is more significant than the security and maintenance services charged of RM200,000 per annum).

2. a.

State THREE (3) properties that are not considered as investment properties: • • • •

b.

property intended for sale in the ordinary course of business or in the process of construction or development for such sale. property being constructed or developed on behalf of third parties. owner-occupied property property that is leased to another entity under a finance lease. According to MFRS 140 Investment Property, the apartment is classified as an investment property since it was rented out to various tenants. On 3 April 2017, the apartment shall be initially recognised at cost of RM71,950,000 (60,000,000 + 11,600,000 + 350,000) Since the company has adopted the cost model in the subsequent measurement of the investment property, the fair value amount should be ignored. The property shall be measured at cost less accumulated depreciation less accumulated impairment loss . 4

It shall be depreciated annually over the useful life of 25 years. Depreciation of RM2,878,000 should be charged in the SOPL . On 31 March 2018, the building is measured at carrying value of 69,072,000 (RM71,950,000 – RM2,878,000) in the SOFP. (ii) The extract statement of profit or loss for the year ended 31 March 2018 (+) Other income: RM Rental income 2,000,000 (-) Expenses: Administrative expenses 3, 078,000 (200,000 + 2,878,000 ) SOLUTION NOVEMBER 2017 1 b. i IP ii. IP iii. IP iv. NOT IP B a. RM 2,000,000 (40,000) 200,000 2,160,000

Stated price Less: Trade discount Legal cost & stamp duty Total c. Dr SOPL FV loss Cr IP

110,000 110,000

SOLUTION FEB 2017 MFRS 140 defines investment property as ‘land or a building or (part of building or both) held by the owner to earn rentals or for capital appreciation or both, and not for: i) use in the production or supply of goods or services or for administrative purposes, or ii) sale in the ordinary course of business. The land clearly satisfied the definition of an item of investment property (it is a land held by Golden Plantation Bhd to earn rental).

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b)

The initial cost of the land that should be recognised in the Statement of Financial Position as at 5th February 2016 is RM6,010,500 (6m +10,000+500)

c)

An investment property shall be derecognised on disposal or when the IP is permanently withdrawn from use and no future benefits are expected from its disposal.

B. a) According to MFRS 140, if the property cannot be sold separately, the property is classified as IP only if an insignificant portion is held for use of owner occupied. Since the owner occupies insignificant portion (1/10), therefore the whole property value is to be treated as investment property.

b)

Journal entries to record the above transactions for the year ended 31 December 2015 and 2016 3 January 2015 DR.Investment property CR. Bank /A/c Payable

RM50,000,000 RM50,000,000

31 December 2015 DR.

Investment property RM20,000,000 CR. SOPL – FV gain on IP RM20,000,000

31 December 2016 DR.

SOPL – FV loss on RM 9,500,000 CR. Investment property RM9,500,000 Bio Majestic Bhd Statement of Financial Position as at 31 December… (extract)

Non current assets Investment property

2015 RM70,000,000

2016 RM60,500,000

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SOLUTION AUGUST 2016

a.

i) If the building can be leased or sold separately, entity accounts for the portions separately; the portion held for rental and/or capital appreciation is treated as IP, while the portion that is owner-occupied is treated as PPE. In this case, 3 storeys will be classified as PPE (owner occupied) under MFRS116 and 17 storeys will be recognised as investment property under MFRS140. ii) If the building cannot be leased or sold separately the whole building will be recognized as investment property under MFRS140 only if that part that is owner occupied is insignificant. In the above case the whole building will be recognized as investment building since the owner occupied part is insignificant (owner-occupied is only 3 storeys as compared to 17 storeys for rental) . i) Cost of investment property= 200,000,000 x 17/20 = RM170,000,000 ii) Cost of investment property = RM200,000,000

B. a.

Initial cost: Purchase price Less discount Legal fees Property transfer taxes

RM 120,000,000 (12,000,000) 500,000 800,000 109,300,000

The interest on finance and administrative expenses will not be capitalized but written off to the SOPL. b.

Dr Investment property Cr Bank/Payable 31/12/2014 Dr investment property Cr SOPL-FV Gain on IP (RM109.3m-RM125m)

RM109,300,000 RM109,300,000

RM15,700,000 RM15,700,000

31/12/15 Dr SOPL-FV Loss on IP (RM118.5m-RM125m) RM6,500,000 Cr investment property RM6,500,000 7

SOLUTION JANUARY 2016 MFRS 140 defines investment property as `land or a building or part of a building or land and building) held (by the owner or under finance lease) to earn rentals of for capital appreciation or both, rather than for: (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business’. Classification of the building according to MFRS140 Investment property: a.

If the services provided by the entity are insignificant to the arrangement as a whole, then the property is classified as an investment property. In most cases cleaning, security and maintenance services will be insignificant and hence the building would be classified as investment property. If the services provided are significant the property should be classified as property, plant and equipment under MFRS116.

b.

The building can be classified as an investment property of the entity because it is held for rentals. The entity is not engaged in the business of operating a hotel (ie the entity is a passive investor) .

i.

On 1/6/2014, the property should be classified as an investment property under MFRS140 because it is held for rental. The property is initially recognised at its COST of RM16,500,000 (15m + 500,000+1m)

On 31/12/2014, the difference of RM300,000 between the fair value of RM16,200,000 and carrying amount of RM16,500,0000 is recognised as a fair value loss in the SOPL. The Investment property should be recognised at its fair value of RM16,200,000 as at 31/12/2014 in the SOFP. On 31/12/2015, the difference of RM1,800,000 between the fair value of RM18,000,000 and carrying amount of RM16,200,000 is recognised as a fair value gain in the SOPL. The Investment property should be recognised at its fair value of RM18,000,000 as at 31/12/2015 in the SOFP. No depreciation is provided. ii. Big Space Bhd Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December… (extract) 8

2014 Other expenses FV loss on investment property Other income FV gain on investment property

2015

(300,000) 1,800,000

Big Space Bhd Statement of Financial Position as at 31 December… (extract) Non current assets Investment property

2014 (FV)RM16,200,000

2015 (FV)RM18,000,00√

SOLUTION AUGUST 2015 a) The land is an asset of Lavender Bhd because it is a present economic resource controlled by Lavender Bhd as a result of past event (it was bought on 1 Jan 2014). The land is expected to increase in value over time. With the land, Lavender Bhd will be able to gain in FV (potential to produce economic benefits to the company) b)MFRS 140 defines investment property as `land or a building or part of a building or land and building) held (by the owner or under finance lease) to earn rentals of for capital appreciation or both, rather than for: (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business’ The land clearly satisfies the definition of an item of investment property (it is a land held by Lavender Bhd for capital appreciation) a)

The value of the land should be disclosed at its Fair Value of RM8,000,000 since it is the policy of the company to use fair value model for its investment property. The difference between the initial cost of the land and its fair value should be accounted for in the statement of profit or loss.

B. a)

3 examples of investment properties:

1)

Land held for long term capital appreciation rather than short term sales in the ordinary course of business. Land held for undetermined future use. A building owned (or held under finance lease) and leased out under operating lease.

2) 3)

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4) 5)

Building that is vacant but is held to be leased out under one or more operating lease. Property being constructed or developed for future use as investment property.

(For subsequent measurement, the carrying amount of IP is compared to its Fair value. Any changes in the fair value of the freehold building (gain/loss) at 31 December 2013 and 2014 should be recognized in the SOPL in the period it arises. For the year ended 31 December 2013, gain in the fair value of RM250,000 should be credited to SOPL. For the year ended 31 December 2014, a loss of RM330,000 should be written off in the SOPL. In the SOFP, the investment property should be recorded at its Fair Value. Journal entries: 31 Dr Bank

CR SOPL (Rental income) DR SOPL:FVLoss (2,750,000-2,420,000) CR IP

280,000

280,000 330,000 330,000

SOLUTION FEBRUARY 2015 Investment property is property (land or a building, or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for: (a) use in the production or supply of goods or services or for administrative purposes,or (b) sale in the ordinary course of business. ii. Floor 1- Floor rented out to tenant should be classified as an investment property based on MFRS 140 since it is held to earn rentals. Floor 2 - Floor occupied by Anas Bhd will be classified as PPE based on MFRS116 since it is used by the company (owner-occupied). Floor3 - Vacant floor and unoccupied should also be classified as an investment property based on MFRS 140 since it is held for undetermined future use.

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iii. The part of the investment property rented out & vacant can be classified as investment property if that portion can be sold separately. If that portion cannot be sold separately, the whole property can be treated as investment property on condition that the owner occupied portion is insignificant. If these conditions are not met then the property should be treated as PPE in accordance with MFRS116. b. 1 January 2013 Dr Investment property Cr Cash

30,000,000 30,000,000

31 December 2013 Dr Investment property 5,000,000 Cr SOPL (FV gain on IP)

5,000,000

31 December 2014 Dr SOPL (FV Loss on IP) 7,000,000 Dr Investment property 7,000,000

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