@iGS' INSTT C BERS OF a Institute of Bankers of Sri Lanka (Established and managed by a Governing Board representing the Central Bank of Sri Lanka, Licensed Banks, Fellows and Associates under the Institute of Bankers of Sri Lanka (Incorporation) Act No.26 of 1979) (IABF) Intermediate in Applied Banking & Finance March 2019 Examination 103 Business Accounting Question Paper & Suggested Answers These suggested answers have been compiled by the College of Banking arid Finance, | Institute of Bankers of Sri Lanka with the assistance of its resource panel. College of Banking & Finance 804, Elvitigala Mawatha, Colombo 08. TP: +94112425754 Web : www.ibshik ——,1964 - 2019 OF BANKERS OF SRi LAN INSTITUTE OF BANKERS OF SRI LANKA (An Institute established and managed by a Governing Board consisting of high-ranking officials from the Central Bank and Licensed Banks and Associates and Fellows under the Institute of Bankers of Sri Lanka (Incorporation) Act No. 26 of 1979) Intermediate in Applied Banking and Finance (IABF) 103 Business Accounting Examination — March 2019 Instructions to Candidates Do not open the question paper until instructed to do so. Time allowed is 3 hours for writing answers and 15 minutes for reading of the paper. The paper consists of 8 questions. Question No. 1 is the Compulsory Question. The balance seven (7) questions are Optional Questions, out of which any four (4) should be answered. Maximum marks for each question is twenty (20). The question No. 2 has ten (10) sub-questions. Each sub-question carries two (2) marks. Question Nos. 3 to 8 has four (04) sub-questions. Each sub-question carries five (5) marks. Provide precise and direct answers with suitable examples wherever possible. Show your workings for answers which require basic calculations. Silent non-programmable calculators may be used for calculations. Start the answer for each question with a new page in the answer book. State the question Number and also the number of the relevant sub-question clearly for each answer. For multiple choice sub-questions in question No.2, state the sub-question Number and write the letter (a, b, ¢ or d) of the selected choice. 308‘The question No. 1 is Compulsory Question, 1. The following information has been extracted from the accounting records of Victory Bank PLC for the financial year ended as at 31.12.2018. (a) Trial Balance as at 31.12.2018 | Debit Credit pein 7 (Rs.) (Rs.) Financial Assets at Amortized Cost 31,000 Financial Assets at Fair Value through Profit or Loss | 15,000 Financial Assets at Fair Value through Other | 10,000 Comprehensive Income ( as at 01.01.2018) Property, Plant and Equipment +H 14,000 Cash and Cash Equivalents 8,000 Balances with Central Bank 3,000 Other Assets 4,000 Amortized Interest Expenses on Financial Liabilities | 7,000 Operating Expenses 4,000 Financial Liabilities at Amortized Cost i - 70,000 Other Liabilities 4,000 ‘Accumulated Depreciation 7,000 Stated Capital 6,000 Statutory Reserve Fund 7,000 OCI Reserve (as at 01.01.2018) 2,000__| Retained Profit (as at 01.01.2018) _ 3,000 | Amortized Interest Income on Financial Assets |__| _13,000 Other Income 5,000 Suspense Account 1,000 Total 118,000 | 118,000 (b) Following adjustments/corrections are required to be recorded when preparing financial statements of Victory Bank PLC for the year ended 31.12.2018. A. Victory Bank PLC calculates impairment on its “Financial Assets at Amortized Cost” on collective impairment basis. As per the available historical data and based on the expected future events, the calculated expected credit loss on such assets, which is yet to be accounted is Rs, 5,000, B. “Financial Assets at Fair Value through Profit or Loss” consist of equity investments of 100 shares in Prosperity Company PLC. The bank has credited the fair value gain of Rs. 5,000 on these shares to the suspense account.C. Victory Bank PLC accounts depreciation on straight line basis. Other details of the Property, Plant and Equipment are as below. ‘The annual depreciation amount for 2018 has been debited to the suspense account. a Date Cost of ‘Annual it Purchased | Purchase (Rs.) | Depreciation Rate Equipment 01.01.2017 10,000 20% Motor Vehicles | 01.01.2016 4,000 25% D. The market value of “Financial Assets at Fair Value through Other Comprehensive Income” as at 31.12.2018 is Rs. 8,000. E, Income tax expenses for 2018 of Rs. 1,000 has been debited to the suspense account. Prepare following financial statements and calculations for Victory Bank PLC in accordance with the Sri Lanka Accounting Standards and in compliance with applicable banking regulations. You must clearly show all calculations and workings. (i) Statement of Comprehensive Income for the year ended 31.12.2018. (7 marks) (ii) Statement of Financial Position as at 31.12.2018. (8 marks) (iii) Statement of Changes in Equity for the year ended 31.12.2018. (2 marks) tiv) Suspense Account with all correcting entries to rectify the errors stated in A to E above. (3 marks) (Total Marks 20) Answer the following multiple choice and direct questions appropriately. () What should be the first action when making a primary entry for a transaction? (a) Posting transactions to the correet ledger accounts (b) Entering the transaction in the correct primary book (©) Deciding the correct ledger accounts to be debited and to be credited (@) Studying the voucher and other source documents to recognize the nature of the transaction (ii) Which accounting concept requires that the information in financial statements is free from bias and free from significant errors? (a) Comparability (b) Reliability (c) Relevance (2) Understandability(iii) (v) @) (vi) wii) Mahaweli Advertising Company provided advertising services to Kelani Investments Ltd in 2017. Even though, Mahaweli Advertising Company received advertising fee for this service in 2018, they have recognized the income in 2017, This recognition of income by Mahaweli Advertising Company in 2017 is justified by: (a) Time period concept (b) Going concern concept (©) Matching concept (d) Accrual Concept Mr. Nimal gives a cash discount of Rs. 1,000 to his customer named Mr. Sunil, The discount is credited to the discounts allowed account. In this respect, Mr. Nimals’ profit has been; (a) Understated by Rs. 1,000 (b) Understated by Rs. 2,000 (c) Overstated By Rs. 1,000 (@) Overstated By Rs. 2,000 When a lease transfers, risks and rewards inherent in the leased asset to the lessee under the lease arrangement, such lease is called as; (a) A finance lease (6) An operating lease (©) A buy back agreement (@)— Arental agreement As per the Banking Act, every Licensed Bank shall appoint ...... a qualified auditor to audit the accounts of such bank. (@) Quarterly (b) Annually (c) Once in Two Years @ Once in Five Years A company purchased a motor vehicle for Rs. 740,000 on 01.01.2018. As at 31.12.2018, the company has recorded only 11 months of depreciation. The motor vehicle is estimated to have a useful life of 4 years with salvage value of Rs. 20,000. If the company is using the straight-line depreciation method, what are the accounting entries to record the year-end adjustment for depreciation?(viii) As at 30.09.2018, cash book reports a bank balance of Rs. 15,000, without (ix) &) recording bank charges of Rs. 500. During this period, cheques to be realized and cheques to be presented were amounting to Rs. 2,000 and Rs. 1,000, respectively. What is the balance available in the bank statement as at 30.09.2018? Rs... What is the amount of credit sales to Mr. Perera during 01.01.2018 to 31.12.2018 as per the information given below: Rs. a Item Amount (Rs.) Mr. Perera - Balance as at 01.01.2018 25,000 Mr. Perera Balance as at 31.12.2018 20,000 Cash received from Mr, Perera during 01.01.2018 to 31.12.2018 20000. Bad debts written-off to Mr. Perera during 01.01.2018 to 1,000 31.12.2018 5 Melody Trading Ltd sells DVD players to its customers. As at 01.01.2018, it had 40 units of DVD players purchased for Rs. 4,000 each. It sells each unit of DVD. player for Rs. 7,000. In the year 2018, it had total sales amounting to Rs. 1,400,000. Purchases during the year are as below March 2018 100 DVD players at Rs. 4,000 each July 2018 70 DVD players at Rs. 5,000 each September 2018 40 DVD players at Rs. 6,000 each Using the following two methods, calculate the cost of closing inventory of Melody Trading Ltd as at 31.12.2018, First in First Out (FIFO) method — Rs... Weighted average cost method — Rs.. (2 marks for each answer) (Total Marks 20) Q3: ‘The following information is available from the books of Winner & Sons for the year ended as at 31.03.2018. Description ‘Amount (Rs.) Balances as at 31.03.2018 Cash 10,000 Debtors _ 20,000 Stocks ania 30,000 Prepaid rent i: 5,000 Long term assets 200,000 Creditors 20,000 Salaries payable 20,000 Bank borrowings payable in 6 months 50,000 Bank borrowings payable in 2 years 150,000 Tong term liabilities 60,000 Shareholders” equity =10,000 Net loss for the year -5,000 Transactions took place during 01.04.2017 to 31.03.2018 — Credit sales ae 43,000 | Cash sales : 20,000 Receipts from debtors ane 10,000 Cash discounts to credit customers 3,000 Sales returns by credit customers 6,000 Sales returns by cash customers 3,000 Bad debtors written-off 7 2,000 Interest expenses on bank loans 20,000 Answers the following questions as per the information given above. @ Calculate the working capital of Winner & Sons as at 31.03.2018. (ii) Calculate the current ratio and the quick assets ratio of Winner & Sons as at 31.03.2018. Gii) Prepare the debtors ledger account of Winner & Sons. (iv) Asa banker, currently you are evaluating a loan application submitted by Winner & Sons with the above financial information for a loan of Rs. 100,000. Do you recommend the applied loan of Rs. 100,000 for Winner & Sons? Explain with three (3) reasons. (5 marks each and Total 20 Marks)4. The following information is available from the books of Nayagara Trading Ltd. for the year ended as at 31.12.2018. Description Amount (Rs.) Cash sales in 2018 _ 1,000,000 Payments to creditors 500,000 Collections from debtors 250,000 Rent paid 200,000 Proceeds from share issue a 2,000,000 Electricity payable 25,000 Equipment purchased 1,500,000 Telephone bills paid in 2017 250,000 idends declared in 2018, but not yet paid 100,000 Dividends declared in 2017 and paid in 2018 150,000 Proceeds from disposal of machinery (book value - Rs, 500,000) 300,000 Loan application submitted for bank borrowing 1,000,000 Answers the following questions as per the applicable accounting standards, concepts and the information given above. @ Explain three (3) types of cash flows presenting in the statement of cash flows with one (1) example for each. (ii) What is the applicability of accrual accounting concept for the preparation of statement of cash flows. Explain. (iii) Prepare the statement of cash flows for Nayagara Trading Ltd. for the year ended as at 31.12.2018, (iv) If the accumulated depreciation for the machinery at the time of disposal is Rs, 300,000, what is the profit on disposal of the machinery? (5 marks each and Total 20 Marks) 5. Briefly explain the following with examples, where necessary. () Double entry book keeping (ii) Going concern accounting concept (ii) Creative accounting (iv) Expected credit loss for impairment (5 marks each and Total 20 Marks)The objective of financial reporting is to provide financial information, including the position, performance and cash flows about the reporting entity to various types of stakeholders who use these information to make decisions. () Identify three (3) parties involved in preparation of financial statements of a financial institution and the key responsibility of them. Write three (3) solutions to minimize the effect of limitations in financial reporting. The recognition and measurement of income and expenses and accordingly the profit is generally used to measure the performance of an entity. Explain the ‘major differences between income and expenses. (iv) A number of different measurement bases are employed in varying combinations in financial statements. Write three (3) of them. (5 marks each and Total 20 Marks) Board Audit Committee plays a key role in improving the quality of financial statements of a licensed bank. (i) Write three (3) responsibilities of the Board Audit Committee that supports to improve the quality of financial statements of a licensed bank. (ii) Write three (3) areas that the Board Audit Committee should consider when assessing the independence of the external auditor to avoid conflict of interest. (iii) When reviewing annual and quarterly financial statements of a bank, what are the areas / aspects that the Board Audit Committee should evaluate in order to improve the acceptability of such financial statements. Write three (3) of them. (iv) As per the Directions applicable on Corporate Governance, the chairman of the Board Audit Committee shall be possessed with qualifications and experience in accountancy and/or audit. Explain the reason for such requirement. (5 marks each and Total 20 Marks) In terms of the applicable Sri Lanka Accounting Standards, explain the following. (i) Current Assets and Current Liabilities (LKAS 1: Presentation of Financial Statements) (ii) Quantitative Disclosures and Qualitative Disclosures of Financial Instruments (SLERS 7: Financial Instruments: Disclosures) (iii) Initial Measurement and Subsequent Measurement of Investment Properties (LKAS 40: Investment Property) (iv) Business Model Test and Cash Flow Characteristics Test on Financial Assets at Amortized Cost (SLFRS 9: Financial Instruments) (S marks each and Total 20 Marks) ikenna eens 308@ (ii) Institute of Bankers of Sri Lanka Intermediate in Applied Banking and Finance ([ABF) 103 Business Accounting Examination — March 2019 Suggested Answers Statement of Comprehensive Income for the year ended 31.12.2018. Victory Bank PLC Statement of Comprehensive Income for the year ended 31.12.2018 Ttem ‘Amount (Rs) ‘Amortized Interest Income on Financial Assets 13,000 Amortized Interest Expenses on Financial Liabilities, (7,000) Net interest Income 6,000 Marked-To-Market Gain on Financial Assets at Fair Value 5,000 through Profit or Loss Other Income 3,000 Impairment G.000) Depreciation = G,000) Operating Expenses (4.000) Profit Before Tax 4,000 Income Tax (1,000) Profit After Tax 3,000 ‘Other Comprehensive Income Fair Value Loss on Financial Assets at Fair Value through (2,000) Other Comprehensive Income ‘Total Comprehensive Incom: 1,000 Statement of Financial Position as at 31.12.2018. Victory Bank PLC Statement of Financial Position as at 31.12.2018 Item oe Amount (Rs.) Cash and Cash Equivalents Bee 8,000 Balances with Central Bank 5,000 Financial Assets at Fair Value through Profit or Loss 15.000 Financial Assets at Fair Value through Other Comprehensive 8,000 Income Financial Assets at Amortized Cost : 37,000 Less: Impairment i 5,000 Property. Plant and Equipment 14,000 Less: Accumulated Depreciation 7,000 Other Assets 4,000 Total Assets 93,000 | Stated Capital ~ 6,000 | Statutory Reserve Fund x OCT Reserve 0 Retained Profit 6,000 Total Equity and Reserves 19,000 Financial Liabilities at Amortized Cost 70.000 Other Liabilities 4,000Gi) (iv) Total Liabilities Total Equity, Reserves and Liabilities Statement of Changes in Equity for the year ended 31.12.2018, Victory Bank PLC Statement of Changes in Equity for the year ended 31.12.2018 ‘Statutory ie : Item Eiated | Reserve | pOCt | Retained | Total pital | RENerT® | Reserve | Profit Opening Balance as at pL ieoie 6,000] 7,000| 2,000) 3,000 18,000 Profit After adaiaiadacana | 3,000} 3,000 Fair Value Loss on Financial Assets at Fair 2,000 -2,000, Value through OCI | ¢ Closing Balance as ani oLstie 6,000 | 7,000 0] — 6,000 | 19,000 Suspense Account with all correcting entries to rectify the errors stated in A to E above. [ leg e Amount Amount | Date Item (Rs) Date | Item a Marked-To- A 31.12.2018 | rhe Gain | 5000 | 31.12.2018 | B/BVF 1,000 31.12.2018 | Depreciation | 3,000 31.12.2018 | Income Tax 1,000 5,000 5,000 (4) Studying the voucher and other source documents to recognize the nature of the transaction (b) Reliability (@) Accrual Concept (4) Overstated By, Rs. 2,000 (a) A finance lease (6) Annually Depreciation expenses Debit 15,000 Accumulated depreciation Credit 15,000 2(viii) Rs. 13,500 (ix) (x) a (ii) (i) Gv) Rs. 46,000 First in First Out (FIFO) method — Rs. 290,000 Weighted average cost method ~ Rs. 230,000 Current ratio = Quick assets ratio = Ttem ‘Amount (Rs) Current assets Cash. a 10,000 Debtors 20.000 Stocks 50,000 Prepaid rent 3,000 Total current assets 85,000 Current liabilities Creditors 20,000 Salaries payable " 20,000 Bank borrowings payable in 6 months _ 50,000 Total current liabilities 90,000 Working e: 5,000 Current assets / Current liabilities * 100 Rs. 85,000/Rs. 90,000 * 100 94% Current assets ~ stocks / Current liabilities * 100 Rs. 85,000 ~ Rs. 50,000/Rs. 90,000 * 100 39% Item | Amount a ‘Amount ” Rs.) _| Rs.) Credit sales | ~ 43,000 | Receipts from debtors | 10,000 : Cash discounts to) 5,000 credit customers Sales returns by eredit| 6,000 customers. | Bad debtors written-off | __2,000 Balance CF 20,000 43,000 43,000 ‘Not recommended ~Reasons Repayment capacity is very remote as per the given information. (a) Negative net worth of Rs.10,000. (6) Currently loss making and cannot cover the interest payment even. (©) Currently having bank loans of Rs. 200,000 and other loan term liabilities of Rs. 60,000. Therefore, high leverage. (@ Both current ratio and quick assets ratios are weak and not to the bench mark. @ (2) Operating cash flows are the main revenue producing cash flows of the entity that are not investing or financing activities, e.g.: cash received from customers and cash paid to suppliers and employees. (b) Investing cash flows are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents, e.g.: purchase of property, plant and equipment, disposal of the same (©) Financing eash flows are the cash flows that change the equity capital and borrowing structure of the entity, e.g,: investing new capital, bank borrowing. (ii) (8) The accrual accounting concept is not applicable for the preparation of statement of cash flows. (b) The accrual accounting concept is used by entities to record their financial transaction at the point when they occur regardless of whether a cash transfer has been made (©) Accrual concept of accounting requires that financial statements reflect, transactions at the time when they actually occur, not necessarily when cash changes the hands. (4) Revenue is recorded when it is eared regardless of when it is received and expenses are recorded when they are incurred, regardless of when they are paid. (©) This basis of accounting is generally used in preparing financial statements except for cash flow statement. (iii) Nayagara Trading Ltd Statement of Cash Flows for the Year Ended 31.03.2018 ‘Amount Item ) Cash Flows from Operating Activities Cash Receipts from Customers 7,250,000 (Rs. 1,000,000 + Rs. 250,000 Cash Paid to Creditors ~500,000 Rent Payment =200,000[__Net Cash flows from Operating Activities 330,000 Cash Flows from Investing Activities Purchase of Equipment 1,500,000} Disposal of Machinery 300,000 Net Cash flows from Investing Activities =1,200,000 Cash Flows from Financing Act Poe Proceeds from Share Issue Dividends Paid Net Cash flows from Financing Acti 1,850,000 ‘Net Cash Increase i 1,200,000 (iv) Ttem Amount Jef Book value of the machinery [500,000 Less: Accumulated depreciation -300.000__ | Net book value 200,000 Sale proceeds 300,000 Profit 1 100,000 () Double entry book keeping (2) Double entry bookkeeping - Every transaction will involve at least two accounts. (6) For example, if a company borrows money from the bank, the ‘company's asset “Cash” is increased and the company's liability “Bank Payable” is increased. (©) Therefore, every entry to an account requires a corresponding and opposite entry to a different account (4) The double entry has two equal and correspondit debit and credit, g sides known as (i) Going concern accounting concept (@) Going concer is a basic underlying assumption in accounting. (b) The assumption is that an entity will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on. (©) In other words, the company will not have to liquidate or be forced out of business in the foreseeable future. (@) An entity must disclose in the financial statements about the going concer and disclosures related to uncertainty about its ability to continue as a going concern, if any, in the notes to the financial statements. Creative accounting (@) Creative accounting consists of accounting practices that follow required laws and regulations, but deviate from what those standards intends to accomplish.(iv) a (i) ©) ©) @ © ® These may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules. Creative accounting can be used to manage earings and to keep debt off the balance sheet. It is a systematic misrepresentation of the true income and assets. e.g! underestimation of expenses, overestimating profits, hiding off balance sheet liabilities. Creative accounting has been at the root of a number of accounting scandals, e.g.: Enron, How to address this issue: Enhancing the quality of corporate governance, encourage to regular reviews (revaluation of assets, investments), increasing the effectiveness of internal and external audit functions, effective intemal control systems, introduction of, documentary procedure manuals, reducing the alternative choices of accounting treatments, evaluating changes in accounting policies and the impact ete. Expected credit loss for impairment @ (b) (©) @ (a) (b) (©) @) (©) (a) (b) (c) (d) ‘The new Sri Lanka Accounting Standard, “SLFRS 9: Financial Instruments” replaced the incurred loss model available in the Sri Lanka Accounting Standard, “LKAS 39: Financial Instruments: Measurement and Recognition” with expected credit loss for impairment with effect from 01.01.2018 Expected credit loss is a forward-looking approach to calculate and account for the impairment. It will consider all possible default events over the expected life of the financial instrument. Accordingly, entities are required to consider historical, current and forward-looking information (including macro-economic data), when caleulating impairment under SLERS 9. This will result in the earlier recognition of credit losses Board of Directors - Overall responsi statements. Chief Executive Officer - Overall oversight on preparation of financial statements. Head of Finance & finance team - Maintenance of books and records and preparation of financial statements. Audit Committee - Assurance on completeness, accuracy and reliability of financial statements and compliance with accounting standards, rules and regulations. Control Functions - Internal audit, compliance and risk management — Independent assurance. ity on preparation of financial Improve internal controls on finaneial reporting. Proper approval processes on changes, e.g. changes in accounting policies with justifications. Provide adequate training to staff on accounting and related practices. Make estimates with due care and with adequate supporting documents, eg,, calculation of fair value. 6co) a (ii) (e) (a) (b) (a) ) © (d) (©) fa) (b) (c) (dd) (a) b) ©) (@) ©) o Provide guidance to staff through operational manuals Income is recognized in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means, in effect, that recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabi For ‘example, the net increase in assets arising on a sale of goods or services or the decrease in liabilities arising from the waiver of a debt payable. Expenses are recognized when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets. For example, the accrual of employee entitlements or the depreciation of equipment. Historical cost Current cost Realizable value Present value Amortized cost Fair value Make recommendations on appointment of extemal auditor, service period, audit fee, resignation or dismissal of the auditor. Implement Central Bank guidelines issued to auditors. Review & monitor the external auditor’s independence, objectivi effectiveness of audit processes in accordance with applicable standards & best practices. Develop & implement a policy on the engagement of an extemal auditor to provide non-audit services that are permitted under the relevant statutes. Before the audit commences, discuss & finalise with the external auditor the nature and scope of the audit. Review the financial information, in order to monitor the integrity of FSs, annual report and quarterly reports prepared for disclosure. Review external auditor’s management letter and the management's responses thereto, Meet at least twice a year the external auditors without the executive directors being present, Providing of non-audit services Service period — 5 years Cooling period ~ 3 years Material business relationships Shareholding, Other relationships which influence the independence such as being an employee, director etc,ib (vy) wo Gi) (iii) @v) (@) Major judgmental areas (b) Any changes in accounting policies and practices (©) Significant adjustments arising from the audit (d) — Going concern assumption (©) Compliance with relevant accounting standards and other legal requirements Key role of the Board Audit Committee is to ensure the quality of financial statements, including accuracy, completeness and compliance with accounting standards. Therefore, to ensure the accomplishment of this role, qualifications, and or experience in the field of accountancy/auditing is required. Current Assets are assets that are expected to be realised in the entity's normal operating cycle or held primarily for the purpose of trading or expected to be realised within 12 months afier the reporting period or cash and cash equivalents. Current Liabilities are those expected to be settled within the entity's normal operating cycle or held for purpose of trading or due to be settled within 12 months or the entity does not have an unconditional right to defer settlement beyond 12 months. Qualitative Disclosures: Describe the risk exposures for each type of financial instrument, management's objectives, policies, and processes for managing those risks and changes from the prior period. Quantitative Disclosures: Provides information about the extent to which the entity is exposed to risk, based on information provided intemally to the entity's key management personnel. These disclosures include: summary of quantitative data about exposure to each risk at the reporting date, disclosures about credit risk, liquidity risk, and market risk and how these risks are manage. Initial Measurement: Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste. or initial operating losses incurred before the investment property achieves the planned level of occupancy. Subsequent Measurement: LKAS 40 permits entities to choose between a fair value model, and a cost model. One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a more appropriate present Business Model Test: The objective of the entity's business model is to hold the financial asset to collect the contractual cash flows (rather than to sell the instrument prior to its contractual maturity to realise its fair value changes). Cash Flow Characteristics Test: The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. 8