RESPONSIBLE REPORTING 300 (RRP 300) DEPARTMENT

IAS 40: Investment Property OF

Prescribed work, notes, class examples and ACCOUNTING
homework questions
H Muchiri
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CONTENTS

PRESCRIBED WORK ..................................................................................................... 2

1. IAS 40: Investment Property ....................................................................................... 2
2. Notes and class examples .......................................................................................... 3
3. Homework questions ................................................................................................... 3
4. General comments ...................................................................................................... 3

SPECIFIC OUTCOME – IAS 40 ...................................................................................... 4

1. Assessment criteria ..................................................................................................... 4
2. Sources ....................................................................................................................... 4

NOTES AND CLASS EXAMPLES .................................................................................. 5

1. The scope of IAS 40 .................................................................................................... 5
2. IAS 40 and the line items of the financial statements .................................................. 5
3. Identifying an investment property............................................................................... 8
4. Recognition and initial measurement of an investment property ................................. 9
Class example 1 – measurement (cost model) ......................................................... 10
5. Subsequent measurement of an investment property ............................................... 11
Class example 2 – measurement (cost model) ......................................................... 11
6. Derecognition of an investment property ................................................................... 13
7. Disclosure of an investment property ........................................................................ 13
Class example 3 – disclosure (cost model) ............................................................... 14
8. Income tax implications ............................................................................................. 15
Class example 4 – applying the cost model with income tax implications ................. 16

HOMEWORK QUESTIONS .......................................................................................... 23

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PRESCRIBED WORK

1. IAS 40: Investment Property

Read and study IAS 40 but ignore the following paragraphs:

 .05 (ignore only the references to IFRS 2 in the definition of “cost” and the
reference to IFRS 13 in the definition of “fair value”)
 .14A
 .15
 19A
 29A
 .30 (ignore only the reference to paras .32A)
 .31
 .32A – .32C
 .33 – .55
 .56(b)
 .57 – .65
 .68 (ignore only the last three sentences dealing with the fair value model)
 .74 (ignore only the last sentence dealing with a right-of-use asset)
 .75 (f)(iv)
 .76 – .78
 .79(d), (vi) and (vii)
 .80 - .86
The following paragraph will be of relevance later when the topic to which it relates is
dealt with:
 .56(a) refers to IFRS 5, where an investment property is classified as a current
asset held for sale or is included in a disposal group that is held for sale.
General comments:
 Many paragraphs in IAS 40 refer to IFRS 16, Leases, where the investment
property is a right-of-use asset in the lessee’s books. This would be the situation
where a property, which is represented by a right-of-use asset in the lessee’s
books (i.e. it is leased by the lessee from a lessor), is then leased out by the
lessee in terms of a sub-lease arrangement. Note that sub-lease arrangements in
IFRS 16, Leases, are not in the RRP 300 scope. RRP 300 will only address
owned investment property. Thus, ignore all references in the paragraphs to a
right-of-use asset.
 The fair value model for subsequent measurement is also excluded from the
RRP 300 syllabus and will be covered in PGDAS.
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2. Notes and class examples

Read and work through this handout and make sure that you understand the content
of the handout.

3. Homework questions

You must do ALL of these questions in detail. Do not do a sample from these
questions – ALL of them are prescribed.

4. General comments

IAS 40 DOES NOT specify that land and buildings must be disclosed in two separate
columns in the “Investment property” note. This is so for both the cost and fair value
models. If you choose to do the disclosure in two different columns, you will not be
penalised (i.e.: you will be awarded the marks) but you will take more time to use this
form of disclosure.

NB: Refer to the specific outcomes on the next page and ensure that you have
achieved the assessment criteria for this topic.
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SPECIFIC OUTCOME – IAS 40

IAS 40: Investment Property

IAS 12: Income Taxes
You should be able to account for and prepare disclosure for all aspects relating to
investment property, including the income tax implications, other than for the following:
- Group issue;
- Investment property held accounted for using the fair value model;
- Transfers to/from investment property;
- Investment property held by a lessee as a right-of-use asset (i.e.: it is sub-leased by
the lessee).
1. Assessment criteria
In order to reach the specific outcome, you should:
1. know and be able to explain the definitions of IAS 40 and in so doing, also be able to
identify assets that are investment property;
2. know when an owned investment property shall be recognised as an asset per
IAS 40;
3. be able to apply the cost model to the initial and the subsequent measurement of an
owned investment property;
4. be able to apply the income tax implications to investment property; and
5. be able to apply the disclosure requirements of IAS 40 correctly in financial
statements.
2. Sources
1. IAS 40: Investment Property
2. IAS 12: Income Taxes
3. IAS 40 Prescribed work, notes, class examples and homework questions
4. IAS 40 Suggested solutions
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NOTES AND CLASS EXAMPLES

1. The scope of IAS 40

The scope paragraphs (IAS 40.02 -.04) are included at level 1, which means that you
must be aware of specific inclusions and exclusions in respect of IAS 40.

2. IAS 40 and the line items of the financial statements

Note: The impact on the statement of cash flows will be addressed later in the
year, in the lecture material of IAS 7, Statement of Cash Flows.

The following provides a basic overview of the line items that are affected by IAS 40:

Example Limited IAS 40

Statement of financial position as at ……….. R
Assets
Non-current assets
Property, plant and equipment
Investment property 
Goodwill
Other intangible assets
Financial assets
Deferred tax (if debit balance) 
Current assets
Inventories
Trade receivables
Other current assets
Cash and cash equivalents
Current tax prepaid (if current tax was prepaid to SARS) 
Total assets
Equity and liabilities
Total equity
Share capital
Retained earnings/Accumulated loss
Other components of equity
Non-current liabilities
Long-term borrowings
Deferred tax (if credit balance) 
Long-term provisions
Current liabilities
Trade and other payables
Short-term borrowings
Short-term portion of long-term borrowings
Current tax payable (if current tax owing to SARS) 
Short-term provisions
Bank overdraft
Total equity and liabilities
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Example Limited
Statement of changes in equity for the year ended ………..
Share Revaluation Retained
capital surplus earnings
R R R
Balance at beginning of the year
Total comprehensive income for the year
Profit for the year
Other comprehensive income for the year
Transfer to retained earnings
Balance at end of the year (refer note 1
below)
(1) The revaluation surplus reserve only relates to revaluation adjustments on owner-
occupied property and not to investment property.

Example Limited
Statement of profit or loss and other comprehensive income for the year ended
………..
R
Revenue (refer note 2 below)
Cost of sales (refer note 2 below)
Gross profit
Other operating income
Selling expenses
Administrative expenses
Other operating expenses
Impairment losses (credit losses) on trade receivables
Gains / (losses) on derecognition of trade receivables
Operating profit
Finance income using the effective interest method
Other finance income
Dividend income
Fair value adjustments on financial instruments
Fair value adjustments on investment property (refer note 3 below) 
Net rental income 
Rental income (refer note 4 below) 
Expenses incurred to generate rental income (refer note 5 below) 
Impairment losses (credit losses) on financial assets (other than trade
receivables)
Gains/ (losses) on the derecognition of financial assets at amortised cost
(other than trade receivables)
Other investment income / (expenses) (refer note 6 below) 
Profit before financing and income taxes
Interest on liabilities that involve only the raising of finance
Other expenses on liabilities that involve only the raising of finance
Other income on liabilities that involve only the raising of finance
Interest on liabilities that involve more than only the raising of finance
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R
Profit before income taxes
Income tax expense (including current and deferred tax) 
Profit from continuing operations
Loss from discontinued operations
Profit for the year

Black line items represent line items that must be presented separately on the face of the
SPLOCI.
Red/italic line items are only a suggestion – these items may be combined /
disaggregated as appropriate.

(2) For RRP 300, only entities where the main business activity is NOT investing in
assets or providing financing to customers are dealt with. If the entity is a property
company, the entity will have a specified main business activity, namely investing in
assets. Therefore, the presentation of a property company will not be examined in
RRP 300. If investing in investment properties is NOT the main business of the
entity, all profit or loss items relating to the investment property will be presented as
investing activities and not operating activities.

(3) Fair value model adjustments (excluded from RRP 300).

(4) Operating lease income from owned investment property.

(5) Depreciation and other costs incurred related to rental income.

(6) Gain/loss on disposal of investment property.

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3. Identifying an investment property

Investment property is property (land or a building or part of a building or both) held by

the owner 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 (IAS 40.5).

Owner-occupied property is property held by the owner for use in the production or
supply of goods or services or for administrative purposes (IAS 40.5).

You will have noted that throughout IAS 40, reference is made to “owned investment
property” and property held by the lessee as a “right-of-use asset”. This distinction
between investment property that is owned and investment property that is leased by a
lessee from a lessor and then sub-leased by the lessee, came about as a result of the
implementation of IFRS 16, Leases.

In terms of IFRS 16, if a lease agreement is entered into between two parties, in terms of
which the property is leased by the lessee from the lessor, the lessee is required to
recognise a “right-of-use asset”. If such a leased property (represented by the “right-of-
use asset” recognised by the lessee) is then leased out by the lessee to another party,
i.e. it is sub-leased, then that right-of-use asset is an investment property. Note, however,
this relates to sub-lease arrangements per IFRS 16, Leases, which is NOT within the
RRP 300 syllabus.

RRP 300 will thus only address investment property that is owned by the entity, i.e.:
referred to in IAS 40 as “owned investment property”.

The following will be classified as investment property (IAS 40.8 and .9):

 Land held for long-term capital appreciation rather than for short-term sale in the
ordinary course of business.
 Land held for a currently undetermined future use.
 A building owned by the entity and leased out under one or more operating leases.
 A building that is vacant but is held to be leased out under one or more operating
leases.
 Property that is being constructed or developed for future use as investment
property.
 However, the following are not classified as investment property:

o Property intended for sale in the ordinary course of business or in the process of
construction or development for such sale.
o Owner-occupied property, including (among other things) property held for future
use as owner-occupied property.
o Property held for future development and subsequent use as owner-occupied
property.
o Property occupied by employees (whether or not the employees pay rent at
market rates)
o Owner-occupied property awaiting disposal.
o Property that is leased to another entity under a finance lease.
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Investment property can have dual use, e.g., a portion is rented out, and a portion is
used to supply services (IAS 40.10):

 If these portions could be sold separately (or leased out separately under a finance
lease), an entity accounts for the portions separately.
 If the portions cannot be sold separately, the property is investment property only if
an insignificant portion is held for use in the production or supply of goods or services
or for administrative purposes.

The entity can also provide additional services to the occupants of an investment
property (IAS 40.11 - .13):

 The property will still be classified as an investment property if the services are
insignificant to the arrangement as a whole. An example is when the owner of an
office building provides security and maintenance services to the lessees who
occupy the building.
 However, if the services provided are significant, the property cannot be classified as
an investment property. For example, if an entity owns and manages a hotel,
services provided to guests are significant to the arrangement as a whole.

4. Recognition and initial measurement of an investment property

An owned investment property shall be recognised as an asset when, and only when:

(a) it is probable that the future economic benefits that are associated with the investment
property will flow to the entity; and
(b) the cost of the investment property can be measured reliably.

 Are day-to-day service costs included in the cost of the investment property?
(IAS 40.18)

If an entity recognises in the carrying amount of an asset the cost of a replacement for
part of an investment property, it derecognises the carrying amount of the replaced part.
For investment property accounted for using the cost model, a replaced part may not be
a part that was depreciated separately. If it is not practicable for an entity to determine
the carrying amount of the replaced part, it may use the cost of the replacement as an
indication of what the cost of the replaced part was at the time it was acquired or
constructed (IAS 40.68).

An owned investment property shall be measured initially at its cost. Its cost will
include (IAS 40.21):

 the purchase price; and

 any directly attributable expenditure. For example, professional fees for legal
services, property transfer taxes and other transaction costs.

If payment for an investment property is deferred, its cost is the cash price equivalent.
The difference between this amount and the total payments is recognised as interest
expense over the period of credit (IAS 40.24).
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The following is not included in the cost of investment property (IAS 40.23):

 Start-up costs (unless they are necessary to bring the property to the condition
necessary for it to be capable of operating in the manner intended by
management).
 Operating losses incurred before the investment property achieves the planned
level of occupancy.
 Abnormal amounts of wasted material, labour or other resources incurred in
constructing or developing the property

 If investment property is acquired in an exchange transaction, how is the cost of the

investment property measured? (IAS 40.27 – .29)

Class example 1 – measurement (cost model)

SERINGA LIMITED acquired two properties comprising land and office buildings five
years ago from which rental income is earned. A third property comprising vacant land
was acquired during the current financial year for R520 000 and it is currently held for an
undetermined use. Transaction costs of R15 000 were incurred directly related to the
purchase of the vacant land.

Investment property is accounted for in accordance with the fair value model, whilst
owner-occupied property is accounted for in accordance with the cost model.

The financial director is unsure of how this vacant land should be classified and initially
measured and has asked you, the financial accountant, to investigate this and report
back to him.

REQUIRED:

Prepare an email response to this inquiry by the financial director about the classification
and initial measurement of the vacant land with reference to IAS 40, Investment
Property.

SUGGESTED SOLUTION:

To: Financial [email protected]

From: Financial [email protected] (Never use own or plausible name)
Subject: Classification and measurement of vacant land

Date: 2 April 20X13

Dear Sir

In relation to your inquiry about the classification and measurement of the vacant land
acquired during the year, find in the attached Appendix A, the results of my investigation
into these matters.
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Should you have any further inquiries, please contact me on xxx xxx xxxx.

Yours faithfully
Financial Accountant

Appendix A

IAS 40.5 defines investment property as property (land or building, part of a building, or
both land and a building) held to earn rental income or for capital appreciation or both,
rather than for use in the production or supply of goods and services or for administrative
purposes.

In terms of IAS 40.8(b), land held for a currently undetermined future use is regarded as
land held for capital appreciation. Thus, the vacant land would be classified as an
investment property/would not classified as owner-occupied property.

IAS 40.20 requires that owned investment property shall be measured initially at cost,
including transaction costs. Thus, the owned vacant land will be measured initially at the
amount paid of R520 000 and the transaction costs of R15 000, which is R535 000.

The fact that investment property is subsequently accounted for in accordance with the
fair value model, whilst owner-occupied property is accounted for in accordance with the
cost model is irrelevant in this instance.

5. Subsequent measurement of an investment property

An entity shall choose as its accounting policy either the fair value model or the cost
model and shall apply that policy to all of its investment property (IAS 40.30).

An entity should determine the fair value of its investment property, for the purpose of
either measurement (if the entity uses the fair value model) or disclosure (if it uses the
cost model). An entity is encouraged, but not required, to measure the fair value of
investment property on the basis of a valuation by an independent valuer who holds a
recognised and relevant professional qualification and has recent experience in the
location and category of the investment property being valued (IAS 40.32).

After initial recognition, an entity that chooses the cost model shall measure investment
property in accordance with the requirements in IAS 16.

Class example 2 – measurement (cost model)

PROP INVESTORS LIMITED (PIL) is a wholly owned subsidiary of Lansam Limited, and
has a reporting date of 31 August. PIL is the property-owning entity in the Lansam
Group.

Lansam Limited required additional factory space for its specialised manufacturing
operations. At a directors’ meeting of PIL, the directors approved the purchase by PIL of
a vacant piece of land on which PIL would construct a factory building specialised to the
needs of Lansam. The factory building will be rented out to Lansam Limited once it is
completed. The land cost R450 000 on 2 January 20X9.
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The factory building’s costs of construction comprised the following:

R
Clearing and cleaning land in preparation for construction 50 000
Building materials 1 025 000
Labour costs 450 000
Architects’ and civil engineers’ fees 25 400
1 550 400

Of this total amount, R950 400 was incurred up to 31 August 20X9 and the remainder
during the period 1 September 20X9 to 31 October 20X9, when the construction of the
building was completed.

On 31 August 20X9, the fair value of the land and factory building under construction
could not be reliably determined, as comparable market transactions are infrequent for
this type of specialised building and the rental agreement was still in the early stages of
negotiation, with the result that no agreement on the rent amount had been reached.
However, on completion, on 31 October 20X9, the fair value was determined to be
R2,9 million and on 31 August 20X10, the fair value was R3,2 million. This fair value is
based on the rental income that will be earned in the future and has not been determined
by an independent valuer who holds a recognised and relevant professional qualification
and who has recent experience in the location and category of the investment property
being valued.
The rental agreement was finalised and signed by both parties on 31 October 20X9.
Assume that Prop Investors Limited accounts for its investment property using the cost
model of IAS 40, Investment Property. Buildings are depreciated over 20 years on a
straight-line basis. The residual value of the building is insignificant.
Ignore all tax implications.
REQUIRED:
Prepare the journal entries to account for the above transactions for the year ended
31 August 20X9 and 20X10 in accordance with IAS 40, Investment Property. Closing
journals and journal narrations are not required.

SUGGESTED SOLUTION:
Dr Cr
R R
2 January 20X9
Investment property (SFP) 450 000
Bank/Creditors/Loans (SFP) 450 000
2 January – 31 August 20X9
Investment property (SFP) 950 400
Bank/Creditors/Loans (SFP) 950 400
1 September – 31 October 20X9
Investment property (SFP) 600 000
Bank/Creditors/Loans (SFP) 600 000
31 August 20X10
Depreciation (P/L) 64 600
Accumulated depreciation – investment property (SFP) 64 600
(1 550 400/20 years x 10/12)
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6. Derecognition of an investment property

An investment property shall be derecognised (eliminated from the statement of financial

position) on disposal or when the investment property is permanently withdrawn from use
and no future economic benefits are expected from its disposal (IAS 40.66).

 Are gains/losses on disposal recognised in profit or loss? (IAS 40.69)

7. Disclosure of an investment property

An entity shall disclose:

 Whether it applies the fair value model or the cost model.

 When judgment was needed to determine whether a property qualifies as investment

property, the criteria used to distinguish investment property from owner-occupied
property and from property held for sale in the ordinary course of business.

 The extent to which the fair value of investment property (as measured or disclosed in
the financial statements) is based on a valuation by an independent valuer who holds
a recognised and relevant professional qualification and has recent experience in the
location and category of the investment property being valued. If there has been no
such valuation, that fact shall be disclosed.

 The amounts recognised in profit or loss for:

o rental income from investment property;

o direct operating expenses (including repairs and maintenance) arising from
investment property that generated rental income during the period;
o direct operating expenses (including repairs and maintenance) arising from
investment property that did not generate rental income during the period.

 The gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period;

 A reconciliation of the carrying amount of investment property at the beginning and

end of the period, showing the following:

o additions, disclosing separately those additions resulting from acquisitions and

those resulting from subsequent expenditure recognised as an asset;
o additions resulting from acquisitions through business combinations;
o assets classified as held for sale or included in a disposal group classified as held
for sale in accordance with IFRS 5 and other disposals;
o depreciation;
o the amount of impairment losses recognised, and the amount of impairment
losses reversed, during the period in accordance with IAS 36; and
o other changes.

 The fair value of investment property. In exceptional cases, when an entity cannot
measure the fair value of the investment property reliably, it shall disclose:
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o a description of the investment property;

o an explanation of why fair value cannot be measured reliably; and
o if possible, the range of estimates within which fair value is highly likely to lie.

 The depreciation methods used and the useful lives or the depreciation rates used.

 The existence and amounts of restrictions on the realisability of investment property or

the remittance of income and proceeds of disposal.

 Contractual obligations to purchase, construct or develop investment property or for

repairs, maintenance or enhancements.

 If the cost model is applied, why does the fair value still have to be determined?
(IAS 40.79(e))

Class example 3 – disclosure (cost model)

Refer to the information provided in class example 2.

REQUIRED:

Prepare the “Investment property” note for inclusion in the financial statements for the
year ended 31 August 20X10 in accordance with IAS 40, Investment Property.
SUGGESTED SOLUTION:
Prop Investors Limited
Notes for the year ended 31 August 20X10

4. Investment property
20X10 20X9
R R
Carrying amount beginning of year 1 400 400 -
Cost 1 400 400 -
Accumulated depreciation - -
Movements during year 535 400 1 400 400
Additions
- acquisitions - 450 000
- subsequent expenditure capitalised 600 000 950 400
Depreciation (64 600) -
Carrying amount end of year 1 935 800 1 400 400
Cost 2 000 400 1 400 400
Accumulated depreciation (64 600) -

The fair value of this investment property on 31 August 20X10 is R3,2 million. This fair
value is based on the rental income that will be earned in the future and has not been
determined by an independent valuator who holds a recognised and relevant
professional qualification and who has recent experience in the location and category of
the investment property being valued.
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The investment property comprises land and a factory building that is being constructed
but which is not yet complete on 31 August 20X9. On 31 August 20X9, the fair value
could not be reliably determined, as the factory building was incomplete and comparable
market transactions are infrequent for this type of specialised building. A rental
agreement was in the early stages of negotiation, with the result that no agreement had
been reached on the rent amount. It was not possible to provide a range of estimates of
fair value on 31 August 20X9.
* In terms of IAS 40.79 (e) a description of the investment property will also be disclosed
in the note.
NB: The information on 31/8/20X9 is required per IAS 40.79(e).

Comment: Whether the entity applies the fair value model or the cost model, the
depreciation methods used and the useful lives or the depreciation rates used will be
disclosed in the accounting policy note.

8. Income tax implications

The tax base of an investment property will be the amount that will be deductible for tax
purposes in the future (provided that the economic benefits that will flow to the entity from
this asset will be taxable) (IAS 12.7).

The tax base is affected by the expected manner of recovery. When the expected
manner of recovery of an asset is through use, the tax base will be the future wear and
tear deductions that will be claimed as the asset is used.

IAS 12.51 requires that the measurement of deferred tax liabilities (the % used to
calculate it) shall reflect the tax consequences of the manner in which the entity expects,
at the reporting date, to recover the carrying amounts of its assets. An asset can be
recovered through use or through sale. The manner in which an entity recovers an asset
may affect the tax rate to be used. The standard tax rate will be applied when an asset is
recovered through use.

The expected manner of recovery for investment property accounted for on the cost
model is through use. Consequently, if this investment property consisted of land and a
building, the tax base will be calculated as follows:

 the tax base of the land will be zero as no tax allowances will be received for land.
Therefore, the IAS 12.15(b) exemption from the recognition of a deferred tax liability
for all taxable temporary differences will apply.
 The tax base of the building will be the allowances that will be received in future (if
the economic benefits that will flow to the entity from this building will be taxable).

These deferred tax consequences will reflect the tax consequences of the recovery of the
carrying amount of this investment property through use and the standard tax rate will
apply.
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In the deferred tax calculation, the investment property will be split between land and
buildings, eg:
CA TB TD DT (27%)
(Dr)/Cr
R R R R
Land 100 000 - 100 000 Exempt
(cost) (future deductions IAS12.15(b)
claimed as land is
used)

Building 100 000 80 000 20 000 5 400

(cost less (future wear and (20 000 x 27%)
accumulated tear deductions to
depreciation) be claimed)

Therefore, the tax implications for investment property accounted for on the cost model
are the same as for property, plant and equipment accounted for on the cost model.
These principles have been addressed in the IAS 12, Income Taxes, study material and
lectures.

Class example 4 – applying the cost model with income tax implications

GINGER LIMITED, which has a 31 December reporting date, has the following land and
buildings on 31 December 20X8:
 Vacant land portion 101 situated in Silver Lakes, Pretoria, that was purchased on
2 January 20X7 at a cost of R300 000.
 Land and a newly constructed and unused office building situated on portion 007,
Centurion, Pretoria, that were purchased on 1 March 20X7 for R6,5 million. It was
estimated at the time of purchase that R500 000 could be attributed to the value of the
land.
 Land and factory building situated on portion 21, Rosslyn, Pretoria, that were purchased
on 1 October 20X7 for R15,8 million. It was estimated that of this total amount paid,
R800 000 was attributed to the value of the land.

Additional information:

1. Portion 101 was acquired and held by Ginger Limited for a currently undetermined
future use.

2. Since its acquisition, approximately 96% of the floor space of the office building is
rented out by Ginger Limited under operating rental agreements. The remaining 4%
(an insignificant portion) of the floor space of the office building is used by
Ginger Limited for its administrative functions. The office building can only be
disposed of as a single unit. On 30 June 20X8, the construction of a security wall
and gatehouse was completed at a cost of R450 000.

3. Since its acquisition, the land and factory building that is situated in Rosslyn has
been rented out by Ginger Limited under operating leases to tenants (lessees) who
conduct manufacturing activities in the factory space.
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4. Operating costs incurred for the land and office buildings and the land and factory
buildings amounted to R625 000 for the year ended 31 December 20X8 and
R520 000 for the year ended 31 December 20X7. The rates and taxes incurred on
portion 101, Silver Lakes amounted to R30 000 for the year ended
31 December 20X8 and R15 000 for the year ended 31 December 20X7.

5. Assume all of the land and buildings were available for use as intended by
management immediately on the date of purchase or completion of construction.

6. Investment property is accounted for in accordance with the cost model. All of the
office buildings and any improvements are depreciated at 5% per year on the
straight-line basis whilst factory buildings are depreciated over an estimated useful
life of 15 years. All residual values are insignificant.

7. The fair values of the various properties were as follows:

31/12/20X8 31/12/20X7
R R
Portion 101, Silver Lakes 310 000 320 000
Land and office building, Centurion 6 900 000 6 100 000
Land 600 000 600 000
Office building (20X8: including improvements) 6 300 000 5 500 000
Land and factory building, Rosslyn 15 600 000 15 300 000
Land 700 000 800 000
Factory building 14 900 000 14 500 000

22 810 000 21 720 000

The fair values of all of the properties have been based on valuations by an
independent property valuator who holds a recognised and relevant professional
qualification and has recent experience in the location and category of the
investment property being valued.

8. The tax rate has remained constant throughout the years at 28%. The South
African Revenue Service (SARS) has indicated that no tax deductions will be
given for the security wall and gatehouse. An allowance of 5% per year on the
cost of buildings used in a manufacturing process that is not pro-rated, is granted
whilst an allowance of 5% per year (not pro-rated) is given on the office building
which is a newly constructed and unused commercial building in terms of the
Income Tax Act.

9. Accounting profit before tax for the year ended 31 December 20X8 and 20X7 is
R1 100 000 and R1 000 000 respectively.
 18

REQUIRED:
Prepare all the notes that will accompany the annual financial statements of Ginger Limited
for the year ended 31 December 20X8 from the information provided, in accordance with
International Financial Reporting Standards.
Notes:  Accounting policy notes are not required.
 The “specified expenses by nature” note is not required.
 Assume all amounts are material.

SUGGESTED SOLUTION:
Ginger Limited
Notes for the year ended 31 December 20X8
20X8 20X7
R R
2. Profit before income taxes

Profit before income taxes stated after the

following:
Expenses
Direct operating expenses:
IAS40.75
(f)(ii) Investment property generating rental income 625 000 520 000
IAS40.75 Investment property not generating rental
(f)(iii) income 30 000 15 000
IFRS 18 Depreciation 1 312 054 500 000
.83(a)(i)
(20X7: 250 0001.2 + 250 0001.3)
(20X8: 300 0001.2 + 1 000 0001.3 +12 0541.2)

3. Income tax expense

Main components of income tax expense:

Current tax – current year (calc 3) 381 375 126 000
Deferred tax – originating and reversing
temporary differences (calc 4) (70 000) 154 000
311 375 280 000

Reconciliation between the income tax

expense and accounting profit
Accounting profit before tax (given) 1 100 000 1 000 000
Tax at standard rate of 28% 308 000 280 000
Expenses not deductible for tax purposes:
Depreciation with no related tax allowances
(calc 3)

(20X8: 12 054 x 28%) 3 375 -

311 375 280 000

The standard tax rate of 28% is the rate announced by the South African tax
authority.
 19

4. Investment property
20X8 20X7
R R
Carrying amount beginning of year 22 100 000 -
Cost 22 600 000 -
Accumulated depreciation (500 000) -
Movements during year (862 054) 22 100 000
Additions
- acquisitions - (a)22 600 000
- subsequent expenditure capitalised (given)450000 -
Depreciation (c)(1 312 054) (b)(500 000)

Carrying amount end of year 21 237 946 22 100 000

Cost 23 050 000 22 600 000
Accumulated depreciation (1 812 054) (500 000)

The fair values of these properties amounted to R22 810 000 (20X7: R21 720 000)
and were determined by an independent professional valuer who holds a recognised
and relevant professional qualification and has recent experience in the location and
category of the investment property being valued.

(a) Land (300 000 + 500 000 + 800 000) + Office building [6 500 000 – 500 000] +
Factory building [15 800 000 – 800 000]) = 22 600 000
OR 300 000 + 6 500 000 + 15 800 000 = 22 600 000
(b) (250 000 + 250 000) = 500 000
(c) (300 0001.2 + 1 000 0001.3 + 12 0541.2) = 1 312 054

5. Deferred tax
20X8 20X7
Analysis of temporary differences R R
Accelerated wear and tear allowances on
investment property (calc 4) 84 000 154 000
 20

Calculations
1. Carrying amount of properties on 31/12/20X7 and 31/12/20X8
R
1.1 Portion 101 Silver Lakes, Pretoria
Cost price 300 000

1.2 Land and office building, Centurion

Land at cost price 500 000
Buildings at carrying amount 31/12/20X8 5 887 946
Cost price (6 500 000 – 500 000 land) 6 000 000
Depreciation: year end 31/12/20X7
(6 000 000 x 5% x 10/12) (250 000)
Carrying amount 31/12/20X7 5 750 000
Additions – 31/12/20X8 450 000
Depreciation: year end 31/12/20X8 (6 000 000 x 5%) (300 000)
(450 000 ÷ 224 ((20 x 12) - 10 - 6) months remaining useful life x 6) (12 054)
6 387 946
1.3 Land and factory building, Rosslyn
Land at cost price 800 000
Buildings at carrying amount 31/12/20X8 13 750 000
Cost price (15 800 000 – 800 000 land) 15 000 000
Depreciation: year ended 31/12/20X7
(15 000 000/15 years x 3/12) (250 000)
Carrying amount 31/12/20X7 14 750 000
Depreciation: year ended 31/12/20X8
(15 000 000/15 years) (1 000 000)
14 550 000
2. Calculation of tax base of properties
2.1 Portion 101, Silver Lakes, Pretoria
Cost price 300 000
Tax deductions for vacant property -
Thus tax base (20X7 and 20X8) -

2.2 Land and office building, Centurion

2.2.1 Land
Land – cost price 500 000
Tax deductions for land -
Thus tax base (20X7 and 20X8) -

2.2.2 Office building

At cost price 6 000 000
Tax allowance: year ended 31/12/20X7 (300 000)
(6 000 000 x 5%)
Tax base 31/12/20X7 5 700 000
Tax allowance: year ended 31/12/20X8 (300 000)
Tax base 31/12/20X8 5 400 000
 21

2.2.3 Gate house and wall

Tax deductions allowed -
Thus tax base 31/12/20X8 -

2.3 Land and factory building, Rosslyn

2.3.1 Land
Land – cost price 800 000
Tax deductions for land -
Thus tax base (20X7 and 20X8) -

2.3.2 Factory building

At cost price 15 000 000
Building allowance: year ended 31/12/20X7 (750 000)
(15 000 000 x 5%)
Tax base 31/12/20X7 14 250 000
Building allowance: year ended 31/12/20X8 (750 000)
Tax base 31/12/20X8 13 500 000

3. Current tax calculation

20X8 20X7
R R
Accounting profit before tax (given) 1 100 000 1 000 000
Non-deductible expenses:
Depreciation on gate house and wall 12 054 -
Temporary differences: 250 000 (550 000)
Depreciation on factory building 1 000 000 250 000
Tax allowance on factory building (750 000) (750 000)
Depreciation on office building 300 000 250 000
Tax allowance on office building (300 000) (300 000)

Taxable profit 1 362 054 450 000

Current tax at 28% 381 375 126 000

 22

4. Deferred tax calculation

CA TB TD DT (28%) (dr)/cr
R R R R

Balance on deferred tax account on 31 December 20X6 Nil

20X7
Land (1.1)300 000 -(2.1) 300 000 Exempt
IAS12.15(b)

Land & office buildings:

Land (1.2)500 000 -(2.2.1) 500 000 Exempt
IAS12.15(b)
Buildings (1.2)5 750 000 5 700 000(2.2.2) 50 000 14 000

Land & factory buildings:

Land (1.3)800 000 -(2.3.1) 800 000 Exempt
IAS12.15(b)
Buildings (1.3)14 750 000 (2.3.2)14 250 000 500 000 140 000
Balance on deferred tax account on 31 December 20X7 154 000

Thus, movement to profit or loss (Rnil  R154 000 cr) = R154 000 dr

20X8 CA TB TD DT (28%) (dr)/cr

R R R R
Balance on deferred tax account on 31 December 20X7 154 000

Land (1.1)300 000 -(2.1) 300 000 Exempt

IAS12.15(b)

Land & office buildings:

Land (1.2)500 000 -(2.2.1) 500 000 Exempt
IAS12.15(b)
Building (1.2)5 450 000 (2.2.2)5 400 000 50 000 14 000
(5,75mil – 300 000 depn)
Gate house 437 946 - 437 946 Exempt
IAS12.15(b)
(450 000 – 12 054 depn)

Land & factory buildings:

Land (1.3)800 000 -(2.3.1) 800 000 Exempt
IAS12.15(b)
Buildings (1.3)13 750 000 (2.3.2)13 500 000 250 000 70 000
Balance on deferred tax account on 31 December 20X8 84 000

Thus, movement to profit or loss: 70 000 cr

(154 000 cr  84 000 cr = 70 000 dr to deferred tax account
 23

HOMEWORK QUESTIONS

QUESTION 1 (28½ marks)

HATTON LIMITED is listed on the JSE Limited and has a 31 December reporting date.
The company manufactures bicycles and related accessories from its business premises
and sells its products to wholesalers situated throughout South Africa.
You are provided with the following information in respect of the year ended
31 December 20X7:
1. Accounting policies
1.1 Land and buildings classified as owner-occupied property are accounted for in
accordance with the cost model. Buildings are depreciated straight-line over their
estimated useful life. The residual value of the buildings is insignificant.
1.2 Land and buildings classified as investment property are accounted for on the cost
model. Buildings are depreciated straight line over their estimated useful life and
their residual value is insignificant.
2. Land and factory buildings
2.1 The land and factory buildings were purchased on 1 January 20X5 for R5,0 million
from Peddle Limited. Of this amount paid, R500 000 was attributed to the land.
The land and factory buildings were available for use as intended by management
immediately. On 1 January 20X5, the useful life of the factory buildings was
estimated to be 15 years.
2.2 There has been no change in the total estimated useful life or residual value of the
factory buildings since their date of purchase.

3. Land and office building

3.1 The land and office building were purchased on 30 November 20X6 at an auction
at the bargain price of R4,5 million (of which R600 000 was attributed to the land).
The land and building had been previously used by its owners for administrative
purposes. Shortly after this property was purchased, the office building was
repainted at a total cost of R300 000. The repainting of the building was necessary
in order to rent the building out (refer 3.3). The office building was available for
use as intended by management on 1 January 20X7 and its total useful life was
estimated to be 20 years.
3.2 On 31 December 20X6, the fair value of the land and office building was
determined by an independent professional valuator who holds a recognised and
relevant professional qualification and has recent experience in the location and
category of the property valued. The fair value of the land and office building was
R6,2 million and of this amount, R700 000 was attributed to the land.
 24

3.3 The office building comprises twelve floors of equal size. None of these floors can
be sold separately. Hatton Limited only uses one of the floors of this office building
for its administrative functions which is considered to be an insignificant portion of
the office building. The other floors are rented out in terms of non-cancellable
operating lease agreements for a ten-year period with effect from 1 January 20X7.
The annual rental received from its lessees in terms of these operating lease
agreements is a constant amount over the ten-year period and there were no
amounts in arrears or in advance on 31 December 20X7.
3.4 There has been no change in the total estimated useful life of the office building
since its date of purchase.
3.5 The fair value of the land and office building on 31 December 20X7 was
R6,4 million. The increase in value was attributed to the land only.
4. Vacant land
4.1 On 30 November 20X7, Hatton Limited purchased a vacant piece of land for
R450 000. The land is held for a currently undetermined future use.
4.2 The fair value of the vacant land on 31 December 20X7 was not materially
different from its cost price.
5. Other matters
5.1 The tax rate has remained unchanged at 28%.
5.2 The South African Revenue Service allows a deduction on buildings used in a
process of manufacture of 10% per year that is not pro-rated. No tax allowances
are granted in respect of commercial buildings unless they were new and unused
on the date of purchase.
5.3 There were no temporary differences on 31 December 20X7 other than those that
are evident from the information provided in points 2 to 4 (inclusive) above.

5.4 The credit balance on the deferred tax account at 31 December 20X6 amounted
to R84 000.

5.5 Profit before tax for the year ended 31 December 20X7 (after the above
transactions and events were taken into account) amounted to R2 423 000.

REQUIRED:
a. Prepare the “income tax expense” note as well as the notes to the statement of
financial position as at 31 December 20X7 of Hatton Limited in accordance with
International Financial Reporting Standards (IFRS).

Note:  Accounting policy note is not required.

 Comparative amounts are not required.
 Round calculated amounts to the nearest Rand.
 A detailed deferred tax calculation is required based on all assets
and liabilities arising from the above information.
 Total columns in the notes are not required.
 25

QUESTION 2 (28 marks)

GRAND DESIGNS LIMITED, a listed company, has a reporting date of 30 April. The
company owns many office buildings that are held to earn rental income as well as some
vacant pieces of land that are held for capital appreciation.

Grand Designs Limited accounts for all of its investment property in accordance with the
cost model. Buildings are depreciated over their estimated useful lives using the straight-
line method and no buildings have significant residual values.

On 1 May 20X12, the carrying amount of investment property comprised the following:

Land Buildings
R R
Property situated in Midrand 2 500 000 15 600 000
Cost 2 500 000 29 000 000
Accumulated depreciation - (13 400 000)
Property situated in Sandton 5 200 000 30 100 000
Cost 5 200 000 36 350 000
Accumulated depreciation - (6 250 000)
Property situated in Stellenbosch 1 900 000 16 300 000
Cost 1 900 000 18 400 000
Accumulated depreciation - (2 100 000)
Vacant land in Centurion – cost 1 800 000 -
Vacant land in Newlands – cost 2 600 000 -
14 000 000 62 000 000

The following additional information is provided related to these investment properties for
the year ended 30 April 20X13:

 The depreciation on the office buildings for the year ended 30 April 20X13 has been
correctly calculated as R5 580 009.

 Accrued repairs and maintenance expenses and insurance expenses related to the
office buildings on 30 April 20X13 and 30 April 20X12 were R250 000 and
R120 000 respectively whilst R1 425 000 was actually paid during the year

 Rates and taxes actually paid during the year ended 30 April 20X13 amounted to
R2 456 100. This was only for the months of May 20X12 to 31 March 20X13. In
terms of municipal valuations performed by the municipalities, the rates and taxes
for April 20X13 were increased on average by 8,5%. Approximately, 5% of the total
rates and taxes expense relates to the vacant land in Centurion and Newlands.

 All of the office buildings are leased out in terms of operating lease agreements.
The straight-lining of all of the lease payments has been correctly calculated as
R16 325 000 per year.
 26

 During the year ended 30 April 20X13, Grand Designs Limited commenced with the
re-zoning application for the vacant land in Newlands. The re-zoning is to be able to
build properties that will be leased out. Costs actually incurred and paid relating to
the re-zoning amount to R127 500 whilst R32 300 is still owed on 30 April 20X13 for
professional services provided by land surveyors related to the re-zoning.

During the year ended 30 April 20X13, Grand Designs Limited purchased the following
properties:

 Land and an office building situated in the Pretoria CBD was purchased on an
auction for R4 925 000 which was a bargain purchase price. Of this amount, 25%
was attributable to the value of the land. The building was in such a poor state of
repair that Grand Designs Limited decided to gut the building and refurbish it. The
total cost of refurbishment was R3 290 000. This included repainting costs of
R250 000 and an amount that was paid to one of the suppliers for air conditioner
units of R525 213. The normal credit terms of this supplier are 30 days from date of
invoice but it was arranged that the amount be paid by Grand Designs Limited 60
days from date of invoice. Average market-related interest rates during the year
ended 30 April 20X13 were 6% per annum, compounded monthly. Costs of
R23 417 were also incurred (included in total cost of refurbishment) relating to a
wall that was built in the wrong position due to an error on the architect’s drawings.
This wall had to be broken down.

Municipal rates and taxes incurred during the period of refurbishment amounted to
R175 000 whilst a further R290 000 was incurred once the building was rented out.

The total estimated useful life of this building is 15 years and the residual value is
insignificant. The building was available for use as intended by management on
1 October 20X12.

An operating lease agreement was signed with a tenant on 1 November 20X12 for
a period of ten years. The lease payment payable annually in advance for the first
five years is R1,8 million whilst R1,5 million per annum is payable for the last five-
year period. The tenant is responsible for the insurance of the contents of this
building. Grand Designs Limited paid an annual insurance premium of R360 000 for
the building structure on 1 November 20X12.

 A vacant piece of land was purchased in Upington for R750 000. An estate agent
based in Upington informed Grand Designs Limited that they were lucky to get the
land for this price as its market value was in the region of R790 000 and that the
R750 000 reflected the fact that so much rubble and litter had been dumped on it.
The municipal rates and taxes incurred and paid for from the time that the land was
acquired amounted to R24 300. Grand Designs Limited incurred R8 500 to clear the
rubble and litter from the piece of land and to prevent this from happening again, a
fence was erected around the perimeter of the property at a cost of R20 500. The
fence was erected on 30 April 20X13.

This vacant land is currently held for an undetermined future use.

 27

The fair value of all of these properties on 30 April 20X13 as determined by an

independent valuator who holds a recognised and relevant professional qualification and
has recent experience in the location and category of the investment properties being
valued, amounts to R82 350 000.

REQUIRED:

Prepare the “Investment Property” note and the “Profit before income taxes” note of
Grand Designs Limited for the year ended 30 April 20X13 in accordance with
International Financial Reporting Standards (IFRS).

Note:  Comparative amounts are not required.

 Round calculated amounts to the nearest Rand.
 Total columns in any notes are not required.
 Ignore any disclosure of lease agreement information required by IFRS 16,
Leases.