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IFRS Revaluation of investment property


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#1 bella.dreamer

bella.dreamer

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Posted 29 December 2013 - 04:19 AM

I am using becker and this is what it says in ch.4 page 40.

 

Under the fair value model (IFRS), the investment property should be revalued with regularity so that the carrying value does not differ materially from fair value. A gain or loss arising from a change in the fair value of the investment property is recognized in earnings in the period in which it arises.

 

Reading this paragraph, to me it means any gain or loss would go to earnings, which means to the I/S. It does not say that only gains which reverses previously recognized losses go to Earnings and excess gain goes to OCI. but the online question says 5,000 gain goes to OCI. Only 10,000 goes to Profit or loss/ Earnings. I am a bit confused.

 

Anyone can explain which one is right?

 

A company has a parcel of land to be used for a future production facility. The company applies the revaluation model under IFRS to this class of assets. In Year 1, the company acquired the land for $100,000. At the end of Year 1, the carrying amount was reduced to $90,000, which represented the fair value at that date. At the end of Year 2, the land was revalued, and the fair value increased to $105,000. How should the company account for the Year 2 change in fair value?

 

a.

By recognizing $15,000 in profit or loss.

b.

By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income.

c.

By recognizing $10,000 in other comprehensive income.

d.

By recognizing $15,000 in other comprehensive income.

 

 

 

Explanation

Choice "b" is correct. The original acquisition price of the land was $100,000. At the end of Year 1, the carrying amount would have been revalued to $90,000. Under the revaluation model of IFRS, the reversal of a revaluation is recognized in profit or loss. For this reason, at the end of Year 2, the portion of the increase in fair value of land from the revalued carrying amount of $90,000 in Year 1 to the original acquisition cost of $100,000 is recognized in profit or loss.

If a revaluation results in an increase in value, however, it should be credited to other comprehensive income. For this reason, the increase in value of $5,000 ($105,000 less $100,000) will be recognized as other comprehensive income.