QUESTION 40-F (SUGGESTED SOLUTION)

a) Accounting treatment in terms of IFRS

In this case the property has a dual purpose as Building A is used for administration 
purposes and Building B is used to earn rentals (and presumably for capital appreciation).
The two buildings should be identified and accounted for separately as they are
separately saleable (separate sites).
Building A is an owner occupied property which is accounted for in terms of IAS 16. 
Building A should be accounted for by using the cost method, i.e. show at cost price less
accumulated depreciation and accumulated impairment losses.
Definition of owner occupied property - A property that is held for use in the production 
or supply of goods or services or for administrative purposes.
Definition of investment property - A property (land or a building, part of a building, or 
both) held to earn rentals or for capital appreciation or both, rather than for use in the
production or supply of goods or services or for administrative purposes or for sale in the
ordinary course of business.
Building B is an investment property and should be accounted for in terms of IAS 40. 
Building B should be accounted for by using the fair value method, i.e. measure at fair
value at each reporting date and recognise fair value differences in profit or loss.
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(5)
b) Journals for the reporting period ended 28 February 2009
Property A

*1/3/2015 800 000 dr 4 900 000

Property (4 500 000 + ) (FP) 8,23
2
Bank (FP) cr 4 900 000
* Recognition of owner-occupied property and
capitalisation of transaction costs.
28/2/2016 Depreciation – property dr 220 000
((4 900 000 - 500 000)/20) (P/L) 
Accumulated depreciation (FP) cr 220 000

* Recognition of depreciation according to
straight line method for 2009.

Property B
*1/3/2015 Investment property
800 000 dr 4 900 000
(4 500 000 + ) (FP) 8,23
2
Bank (FP) cr 4 900 000
* Recognition of investment property and
capitalisation of transaction costs.
28/2/2016 Fair value adjustment (P/L) dr 100 000

Investment property (FP) cr 100 000
* Fair valuation of investment property at the
reporting period.
* Not required - shown for sake of completeness.
If no amounts are given, entries are not marked.
(4)
QUESTION 40-F (SUGGESTED SOLUTION - CONTINUED)

c) Journals for the reporting period ended 28 February 2017

Property A
1/6/2016 Depreciation (P/L) - property dr 55 000

Accumulated depreciation (FP) cr 55 000
* Recognition of depreciation for 3 months
until fire (4 900 000 - 500 000/20 x 3/12) on
Building A.
Impairment loss (P/L) dr 2 800 000
Accumulated impairment loss (FP) cr 2 800 000
* Impairment of Building A to recoverable
amount.
1/7/2016 Fair value adjustment (P/L) dr 500 000

Investment property (FP) cr 500 000
* Fair valuation of investment property B at
the transfer date (4 800 000 - 4 300 000).
Property (FP) dr 4 300 000
Investment property (FP) cr 4 300 000
* Transfer of investment property to
owner-occupied property (Building B).
28/2/2017 Property (FP) dr 1 100 000

Bank/Payables (FP) cr 1 100 000

* Capitalisation of restoration costs on
Building A.
Depreciation - property (P/L) dr 133 333
Accumulated depreciation (FP) cr 133 333
* Recognition of depreciation on owner-
occupied property (Building B).
(4 300 000 - 500 000/19) x 8/12.
Depreciation (P/L) dr 73 000
Accumulated depreciation (FP) cr 73 000
* Recognition of depreciation on remainder
of Building A. (1 825 000/225 x 9).
NB - The fair value of Building B at 28/2/2017 is irrelevant as it is no
longer an investment property that should be fair valued.
Max (16)
Calculation:
CA = 4 900 000 - 220 000 - 55 000 = 4 625 000
FV less costs to sell = 2 000 000 - 175 000 = 1 825 000
Value in use = 1 700 000
Recoverable amount is higher of FV less cost to sell and Value-in-use
 1 825 000 > 1 700 000
= 1 825 000

 Impairment loss = CA - RA
= 4 625 000 - 1 825 000 (If calculated )
= R2 800 000
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(25)