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    CPA Official IAS 40 Ans

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    Kambi Official
    The document provides the marking scheme and suggested solution for an accounting question. It discusses the treatment of remeasurement gains and losses for different types of assets under various standards. It also includes example journal entries to record transactions like revaluation, purchase and disposal of investments.

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    CPA Official IAS 40 Ans

    Uploaded by

    Kambi Official
    35 views3 pages
    The document provides the marking scheme and suggested solution for an accounting question. It discusses the treatment of remeasurement gains and losses for different types of assets under various standards. It also includes example journal entries to record transactions like revaluation, purchase and disposal of investments.

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    Ias 40

    Original Title

    CPA Official IAS 40 ans

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    The document provides the marking scheme and suggested solution for an accounting question. It discusses the treatment of remeasurement gains and losses for different types of assets under various standards. It also includes example journal entries to record transactions like revaluation, purchase and disposal of investments.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    35 views3 pages

    CPA Official IAS 40 Ans

    Uploaded by

    Kambi Official
    The document provides the marking scheme and suggested solution for an accounting question. It discusses the treatment of remeasurement gains and losses for different types of assets under various standards. It also includes example journal entries to record transactions like revaluation, purchase and disposal of investments.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Marking scheme:

    SOLUTION 5

    Explanation and treatment of remeasurement gains / losses for PPE 4


    Explanation and treatment of remeasurement gains / losses for Investment Property 2
    (a)

    Explanation and treatment of remeasurement gains / losses for Financial Assets 4


    Subtotal 10

    Calculation of carrying value at 1 April 2014 1


    (b)

    Explanation and treatment of revaluation at 1 April 2014 (journal required) 2


    (i)

    Calculation of revaluation gain to 31 March 2015 1


    Explanation and treatment of revaluation gain to 31 March 2015 (journal required) 1
    Subtotal 5

    Explanation and treatment of dividend received (journal required) 1


    Explanation and treatment of purchase of investments (journal required) 1
    (ii)

    Explanation and treatment of disposal of investments (journal required) 2


    Explanation and treatment of revaluation gain to 31 March 2015 (journal required) 1
    Subtotal 5

    [Total: 20 Marks]

    Suggested solution

    Under the revaluation model of IAS 16 revaluation gains and losses are treated differently depending on
    (a)

    whether they are originating or reversing.


    (i)

    An originating gain on revaluation of PPE (meaning one which is occurring for the first time, and not reversing
    a previously recognised loss) is recognised through “Other Comprehensive Income (OCI)” in the SPLOCI. This
    is then taken to a separate component of equity, usually called “Revaluation Surplus” reserve.

    An originating loss on revaluation is taken to profit or loss as an expense.

    A revaluation gain that is reversing a previously recognised loss is taken to profit or loss as a gain until the
    effect of the previously recognised loss is completely reversed. This takes into account any difference in
    depreciation charges arising as a result of the previous loss lowering the depreciable amount. Any gain over
    and above the amount recognised in profit or loss is treated as an originating gain, and taken to OCI.

    A revaluation loss that is reversing a previously recognised gain is taken to OCI until the effect of the
    revaluation gain is reversed. This means in effect that OCI is charged with the expense until the accumulated
    revaluation surplus remaining in equity has been eliminated. Any further loss is treated as an originating loss
    and taken to profit or loss.

    It should be noted that gains and losses on different assets may not be offset against each other. Any reversal
    must be relating to revaluations of the same asset.

    Under the fair value model of IAS 40, all gains or losses on investment property are taken to profit or loss and
    on to Retained Earnings reserve. There is no revaluation surplus reserve where investment property is
    (ii)

    concerned. Likewise, there is no difference between originating and reversing gains and losses under IAS 40.

    Under IFRS 9 financial assets may be held under the “fair value” or the “amortised cost” categories. The
    categorization is not optional, but depends on the type of instrument and the entity’s business model for
    (iii)

    holding it. The “fair value” method is the default and applies to all financial instruments to which the “amortised
    cost” method does not apply.

    Page 22
    Under IFRS 9, gains and losses on remeasurement of such assets are normally taken to profit or loss,
    affecting the retained earnings reserve ultimately. However there is a limited exception to this. If the financial
    asset in question is an equity investment, and an election has been made at the date of purchase, any gains
    or losses on remeasurement are taken to OCI, and on to a separate component of equity. This election is
    irrevocable once made, but may be applied or not as decided on the date of purchase.

    This property was an IAS 16 property until 1 April 2014 and an IAS 40 investment property after this date. The
    (b)

    accounting treatment therefore changes on the date it became an investment property. Any revaluation gains
    (i)

    or losses up to that date are accounted for under IAS 16, and any arising since are accounted for under IAS
    40.

    The carrying value of the property at 1 April 2014 was as follows:


    Land Building
    €million € million
    Cost 1.0 2.5
    Depreciation to 31 March 2013 (3.5 – 1.0)/25 (0.1)
    Depreciation to 31 March 2014 (same) (0.1)
    Carrying value (before revaluation) 1.0 2.3

    Fair value at 1 April 2014 1.9 2.2


    Revaluation gain (loss) 0.9 (0.1)

    The revaluation gain would be taken to OCI and the revaluation loss to profit or loss as they were recognised
    in the financial year ended 31 March 2015. The depreciation relates to previous years, so its recording is not
    the subject of the requirement.

    Journal entry 1 April 2014: DR €m CR €m


    Dr Accumulated depreciation 0.2
    Dr Profit or loss 0.1
    Cr Buildings 0.3
    Dr Land 0.9
    Cr OCI / Revaluation surplus 0.9

    From 1 April 2014 the property is considered an investment property.

    Journal entry 1 April 2014: DR €m CR €m


    Dr Investment property 4.1
    Cr Land 1.9
    Cr Buildings 2.2

    Under IAS 40, investment property is not depreciated and is revalued to fair value at each reporting date. Any
    gains or losses are taken to profit or loss.
    Investment property
    €million
    Fair value 1 April 2014 4.1
    Fair value 31 March 2015 4.8
    Fair value gain 0.7

    Journal entry 31 March 2015: DR €m CR €m


    Dr Investment property 0.7
    Cr Profit or loss 0.7

    Page 23
    (ii) Dividends received are recognised as income regardless of the treatment of the financial assets.

    Journal entry to record dividends received: DR €m CR €m


    Dr Cash 0.75
    Cr Profit or loss 0.75

    Journal entry to record purchase of investments: DR €m CR €m


    Dr Financial assets 1.6
    Cr Cash 1.6

    Remeasurements are treated in accordance with the policy of the entity. We must assume that the irrevocable
    election required by IFRS 9 was made as this is the policy of Williamson Ltd.

    Journal entry to record remeasurement and disposal: DR €m CR €m


    Dr Financial assets (1.1 – 0.9) 0.2
    Cr Other comprehensive income 0.2

    Dr Cash 1.1
    Cr Financial assets 1.1

    The assets held at the period end must be remeasured to €14 million. These are already carried at €12.7
    million (12.0 – 0.9 + 1.6). The original carrying value included €0.9 relating to the investments sold, so these
    are no longer there. In addition, new assets costing €1.6 million were purchased.

    The fair value of these remaining assets on 31 March 2015 was 14 million, hence a gain of €1.3 million (14
    – 12.7) must be recognised.

    Journal entry to record remeasurement at 31 March 2015: DR €m CR €m


    Dr Financial assets 1.3
    Cr Other comprehensive income 1.3

    Page 24

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