Financial Reporting – Buildings, Revaluation & NRV

Question 1

On 1 January 20X4, Jet Fly Pte Ltd. (JFL) purchased two buildings: Building A near east coast for $37.5 million and Building B near Pasir Ris for $12.5 million. The company also paid a legal fee of $240,000 and agent’s commission of $60,000 to complete the transfer of the title deeds for both buildings. The decision for the purchase was the result of a favourable market study which the company paid $17,000 for on 30 June 20X3. Both buildings have useful of 50 years with zero residual value. The company adopts the straight-line method for depreciation of its non-current assets.

The company intends to use Building A for its office and to hold Building B for capital appreciation.

On 1 October 20X5, the company moved its office to another premises and put Building A and Building B up for sales.

On 30 November 20X5, Building B was sold for 12,500,000 (net of the cost of disposal).

The fair value and value-in-use of the buildings are given as below:

Date		Fair Value ($)	Value In Use ($)
1 January 20X4	Building A	37,200,000
	Building B	12,600,000
31 December 20X4	Building A	35,570,000	32,781,000
	Building B	12,780,000	12,550,000
1 October 20X5	Building A	36,879,250	36,559,000
	Building B	11,849,900	12,100,500
31 December 20X5	Building A	35,825,000	37,729,000

The cost of disposal (sale) is $50,000.

Additional information:

The company does not practice reserve transfer for the revaluation model.
When assets are adjusted for revaluations, the company adopts the elimination method.
The company financial year ends on 31 December.
The company has initially not decided on which model to use for the buildings.

Required:

Consider all accounting models available under Financial Reporting Standards (FRS) for each of the two buildings. Identify and list all possible options for the accounting treatment of the buildings. For each scenario, assess the information given, discuss and illustrate the accounting treatments for the year 20X4 and 20X5. Workings and explanations must be clearly shown, and all necessary journal entries to be provided. Carrying amount of the assets must be clearly stated at the end of each reporting period. Round your answers to the nearest whole number.

Organize your answer in the following format:

Classification of the assets
Measurement at initial recognition
Measurement after recognition

3.1. Building A option 1

Building B option 1

Question 2

A company has a large batch of slow-moving goods near year-end. The marketing manager argues that because these goods are still in good condition and might sell in the future, the company should keep their inventory valuation at cost.

The accountant suggests writing down the inventory to net realisable value (NRV), since there is no clear evidence of demand.

Required:

Evaluate the differing views of the marketing manager and the accountant. In your discussion, apply the relevant accounting principles, demonstrate the professional judgment required, identify the types of evidence needed to support each position, and conclude with your justified recommendation as the accountant.

Expert Answers on Above Questions on Financial Reporting

Accounting for buildings under FRS

The classification for building A can be done as plant, property and equipment that is used for office purposes, and for building B, it is classified as investment property.
Initial measurement – the total cost allocation excluding the market study cost of $17000 is A= $37725000 and B=$12575000

Subsequent measurement

Option 1 – Cost Model
For building A, for 20X4 the annual depreciation is $754500, recommerable amount is $35570000 and impairment loss is $1400500. The new carrying amount is $35570000.
For 20X5, depreciation for 9 month till October is $565875, recoverable amount is $36559000, impairment reversal is 36559000.
Held for sale – comparison with FV after deducting cost to sell is $36829250. The carrying amount remains $36559000
Option 2 – revaluation model
It involves adjusting the asset to fair value, and losses are attributed to profit and loss while the gains to OCI. It will reflect the updated fair value at annual level.
Building B
Option 1: Fair value model
There is no depreciation applicable and for 20X4, the FV gain is $205000 and for 20X5, the FV loss is recognised before sale. It is sold at: 12500000 and the gain on disposal is $650100.
Option 2 – cost model
It takes into account the depreciation along with empowerment, and it is less relevant as compared to the fair value model.

Inventory valuation

Evaluation of views – the marketing manager wants to keep the inventory value at cost on the basis of future sales. The accountant applies lower of Cost and NRV and recognizes the risk of slow moving stock. The professional judgement avoids over statement of assets, uses reliable evidence and applies a conservative approach.
Recommendation – the valuation of inventories should be done on the basis of NRV because there is uncertainty in the demand, and risk of overvaluation is also very high.

This model answer is reviewed by Rui Shi, financial accounting expert good at performing financial analysis using accounting principles.

Disclaimer: This answer is a model for study and reference purposes only. Please do not submit it as your own work.

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