Question

As at December 31, 2018 Concorde Plc has three real estate objects: Object 1. Half of this property is used for administrative purposes of Concorde Ple, the second half is leased to third parties. The initial cost of this property four years ago was £2 million and had a life of 50 years. In November 2018, a similar property was sold for Concorde Plc3.6 million. Object 2. The property is an office building that is leased to third parties. The office block is loaded at about 70% per year (average for last 5 years). Each office that is not rented out remains unused or from time to time Concorde Plc holds meetings in it. The current carrying amount of this property is £0.9 million. At 1 January and 31 December 2018, its fair value was £1.1 million and £1.5 million, respectively. Object 3. The property is leased to another company for production purposes. As at January 1, 2018, the fair value of this property was £6.3 million, and as of December 31, 2018, it decreased to £5.8 million. The management of Concorde Plc believes that such a decrease in value is temporary and that the value should rise next year, when prices in the real estate market rise. The management of Concorde Plc intends to apply the model of subsequent measurement at fair value in accordance with IAS 40 "Investment Property". Explain how each of the three objects should be reflected in the financials of Concorde Plc as at December 31, 2018 in accordance with IFRS.

Answer 1

As per IAS 40 :

Properties with dual purpose-

a) if we can split the property clearly, we can account each portion on individual basis.

b) If they are non-separable, the whole property will be treated as Investment Property, if the owner's occupancy is insignificant.

Object 1 : This property is in dual-use. Half of it is used by the company for administrative purposes and the other half is let out. Here owner's occupancy is not insignificant (50%), hence this portion is to be treated as PPE and recorded at cost less accumulated depreciation under IAS 16, at 0.92 million (See Appendix-1 below). The other portion is to be treated as investment property and recorded at arm's length price (similar property), half of 3.6 million = 1.8 million.

Object 2 : The property is 70% let out on average and 30% is either unused or used by Concorde Plc to conduct meetings. It looks like Concorde's occupancy is insignificant here. Hence this object will be treated as Investment Property and can be reflected in its fair value as of December 31, 2018 in the financials, 1.5 millions.

Object 3 : As per IAS 40 the fair value of an investment property should be determined based on the current market conditions. Recognize the decrease in fair value in profit/loss and show the property at 5.8 million.

Let me know if you have questions! Thanks and have a great day!

Appendix 1-

Cost	2 million	a
Useful life	50 years	b
Portion of PPE	50%	c
Annual depreciation	0.02 million	d = a*c/b
Depreciation accumulated for 4 years	0.08 million	e = d*4
Cost less accu.depreciation	0.92 million	(a*c)-e