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Chapter 6

Q. 6.26

Company GAMMA owns a building (investment property) which was rented to third parties. On December 31st, 20X2, the managers decide to start using this building for the company’s administrative purposes. The building’s fair value at December 31st, 20X1, amounts to 22,000 lei and on December 31st, 20X2, 22,500 lei. The carrying amount of the investment property on December 31st, 20X1, is 20,000 lei. At the beginning of financial year 20X3, the useful life of the building is estimated to be 20 years. On December 31st, 20X3, the building’s recoverable value amounts to 19,500 lei. Disclose the accounting aspects of the building for financial years 20X1 to 20X3.


Verified Solution

Based on the information provided, the company will apply the accounting treatment for investment property measured at fair value from 20X1 to 20X2 pursuant to IAS 40. On December 31st, 20X2, the building will be reclassified from investment property to buildings used by the entity. From January 1st, 20X3, the building will be held for the company’s own use and will be evaluated at cost minus accumulated depreciation minus impairment adjustments according to IAS 16 and IAS 36.
Therefore, Gamma will journalise the following transactions:
1) On December 31st, 20X1—Evaluation of the investment property at fair value (22,000 lei)
Carrying amount ………………………… 20,000 lei

Fair value …………………………………22,000 lei

Increase of the asset’s value with ………… 2000 lei

2000 lei             Investment property         =            Gains from the valuation of investment property at fair value                2000 lei


2) On December 31st, 20X2—Reclassification of the investment property to buildings held for the company’s own use
According to IAS 40, the fair value of the building at the change of use is the ‘cost‘ of the property under its new classification. Therefore:
Assigned cost of the building …………… 22,500 lei (the new fair value)

Carrying amount before transfer …………22,000 lei (previous fair value)

Increase of the asset’s value with …………….500 lei

22,500 lei                  Buildings             =          %                                                22,500 lei

Investment property                     22,000 lei

Gains from the valuation of
investment property at fair
value                                                   500 lei


3) On December 31st, 20X3, annual depreciation is recorded after 1 year of use
Annual depreciation = Carrying amount/Useful life = 22,500 lei/20 years = 1125 lei/year

1125 lei              Expenses with the depreciation of NCA      =         Accumulated depreciation of buildings                  1125 lei


4) On December 31st, 20X3, an impairment test takes place and the recoverable value is 19,500 lei pursuant to IAS 36^{18}
Carrying amount = Cost − Accumulated depreciation = 22,500 − 1125 = 21,375 lei

Recoverable value = 19,500 lei

=> Decrease of the asset’s value with 1875 lei
The company will record an impairment adjustment as follows:

1875 lei               Expenses with impairment adjustments of NCA     =      Impairment adjustments of buildings                 1875 lei


At the end of financial year 20X3, the value of the building which is to be disclosed in the Balance Sheet is:
Cost − Accumulated depreciation − Impairment adjustments = 22,500 − 1125 − 1875 = 19,500 lei.