Name: Section: Date:

Written Recitation

1. What is an owner occupied property?

Owner-occupied property is property held (by the owner, or by the lessee under a finance lease) for use in the business and IAS 16
Property, Plant and Equipment applies to owner-occupied property.

2. Give examples of items that are not investment property and are outside the scope of PAS 40
(1) property held for sale in the ordinary course of business, or in the process of construction, or development. These are
accounted for under IAS 2 Inventories, or IFRS 5.
(2) property being built, or developed, on behalf of third parties. These are accounted for under IAS 11 Construction
Contracts.
(3) owner-occupied property. This is accounted for under IAS 16.
(4) property that is leased to another bank, under a finance lease.

3. B is a supplier of industrial paint in Germany. In 20X3, B purchased a plot of land on the outskirts of Frankfurt that has mainly
low-cost public housing and has very limited public transport facilities. The government has plans to develop the area as an
industrial park in five years’ time, and the land is expected to greatly appreciate in value if the government proceeds with the
plan. B’s management has not decided what to do with the property. How should the management classify the property and
why?
Management should classify the property as an investment property. Although B has not determined a use for the property
after the park’s development, in the medium term the land is held for capital appreciation.
IFRS considers land as held for capital appreciation if the owner has not determined whether it will use the land either as
owner- occupied property, or for short-term sale, in the ordinary course of business. The owner should choose either the fair
value model, or the cost model, to recognise the investment property.

4. A bank owns an office building. The bank occupies nine of the ten floors as its head office, while the tenth floor is leased out to
a third party under an operating lease. Management proposes that the property be treated entirely as PPE because the portion
leased to a third party is leased under an operating lease and only represents 10% of the property. How should the
management recognize the property?
Management should recognise nine floors as PPE, but the remaining one floor as investment property. The conditions
regarding separate sale or lease under finance lease relate only to management’s ability and not to the terms of any current
lease. The requirement for the property to be capable of being leased under a finance lease is to ensure that the definition of
an investment property included in of IAS 40 is met. The amount of the property leased, 10%, is more than an insignificant
portion of the property. The requirement to account separately for the PPE and investment property elements must be
followed, assuming the 10th floor can be sold, or leased out under a finance lease.

5. Examples of costs that should be expensed in the income statement, (and not capitalized) are:
(i) 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),
(ii) operating losses incurred before the investment property achieves the planned level of occupancy, or
(iii) abnormal amounts of wasted material, labour or other resources incurred in constructing or developing the property.
If payment for an investment property is deferred, its cost is the cash price equivalent. The difference between the cash price
equivalent and the total payments is recorded as interest expense over the period of credit.

6. Explain significant influence

Where an entity holds 20% or more of the voting power (directly or through subsidiaries) on an investee, it will be presumed
the investor has significant influence unless it can be clearly demonstrated that this is not the case. If the holding is less than
20%, the entity will be presumed not to have significant influence unless such influence can be clearly demonstrated. A
substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence.

7. Enumerate the factors which presents the existence of significant influence

• representation on the board of directors or equivalent governing body of the investee;
• participation in the policy-making process, including participation in decisions about dividends or other distributions;
material transactions between the entity and the investee;
• interchange of managerial personnel;
• or provision of essential technical information

8. What are the exemptions from applying the equity method

 The entity is a parent that is exempt from preparing consolidated financial statements under PFRS 10 Consolidated Financial
Statementsor or if all of the following four conditions are met (in which case the entity need not apply the equity method):

 the entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including
those not otherwise entitled to vote, have been informed about, and do not object to, the investor not applying the equity
method
 the investor or joint venturer's debt or equity instruments are not traded in a public market
 the entity did not file, nor is it in the process of filing, its financial statements with a securities commission or other
regulatory organisation for the purpose of issuing any class of instruments in a public market, and
 the ultimate or any intermediate parent of the parent produces financial statements available for public use that comply
with PFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with
PFRS
9. Cases which the use of the equity method should cease from the date that significant influence or joint control ceases
a. If the investment becomes a subsidiary, the entity accounts for its investment in accordance with PFRS 3 Business
Combinations and PFRS 10
b. If the retained interest is a financial asset, it is measured at fair value and subsequently accounted for under PFRS 9
c. Any amounts recognised in other comprehensive income in relation to the investment in the associate or joint venture
are accounted for on the same basis as if the investee had directly disposed of the related assets or liabilities (which
may require reclassification to profit or loss)
d. If an investment in an associate becomes an investment in a joint venture (or vice versa), the entity continues to
apply the equity method and does not remeasure the retained interest

10. What are the characteristics of a fixed asset?

a. Fixed assets are acquired for use in operations and not for resale.
b. Long term in nature and subject to depreciation.
c. Possess physical substance

11. State the rules in determining cost of land

Cost of Land - When land has been purchased for the purpose of constructing a building, all costs incurred up to excavation
for the new building are considered land costs.
a. Land Cost Includes:
i. Purchase Price, Brokers’ Commissions, Title and Recording Fees, Legal Fees, Draining of Swamps,
Clearing of Brush and Trees, Site Development, Existing obligations assumed by buyer (including
mortgages and back taxes), demolition of existing building,
ii. LESS: Proceeds from sale of existing buildings, standing timber, etc.
b. Land Improvements (Depreciable)
i. Fences, Water Systems, Sidewalks, Paving, Landscaping, Lighting
c. Interest Cost – Interest cost during construction period may be added to cost of land improvement based on weighted
average of accumulated expenditures.

12. Write whether the borrowing cost is expensed or capitalized

Summary Before During After
Construction Construction Construction
Borrowed funds (not use) Expense Expense Expense
Borrowed funds (weighted average of accumulated N/A Capitalize Expense
expense)
Excess (about amount borrowed) expenditures N/A Capitalize Expense
(weighted average interest rate)

13. Explain then concept of Depreciable Assets and Depreciation

The basic principle of matching revenue and expenses is applied to long-lived assets that are not held for sale in the ordinary
course of business. The systematic and rational allocation used to achieve “matching” is usually accomplished by
depreciation, amortization

14. Enumerate 2 kinds of depreciation and define each.

i. Physical Depreciation – related to an assets deterioration and wear over a period of time.
ii. Functional Depreciation – arises from obsolescence or inadequacy of the asset to perform efficiently. Obsolescence
may result from diminished demand for the product that the depreciable asset produces or from the availability of a new
depreciable asset that can perform the same function for substantially less cost.

15. Enumerate at least 4 basic depreciation methods and explain the concept of each.