Based on MFRS 140, discuss the recognition of investment property should the company provides ancillary services...

Based on MFRS 140, discuss the recognition of investment property should the company provides ancillary services to the occupants of a property.

(4 marks) **In Malaysia**

On 1 January 2019, Wisteria Bhd purchased a factory for investment purposes. The cost of factory was RM 300 million and is expected to have useful life of 50 years with no salvage value. As at 31 Dec 2019, the market value of building was RM330 million, but as at 31 Dec 2020, it dropped to only RM 290 million.

Based on Fair Value Model, prepare the journal entries to record:

the initial recognition of the factory
fair value gain for the year
fair value loss for the year

Expert Solution

a. Based on MFRS 140, discuss the recognition of investment property should the company provides ancillary services to the occupants of a property.

If the ancillary services provided are insignificant then the entity may treat the property as investment property. Where the services provided are more significant, the property should be classified as owner occupied.

In some cases, an entity provides ancillary services to the occupants of a property it holds. An entity treats such a property as investment property if the services are insignificant to the arrangement. An example is when the owner of an office building provides security and maintenance services to the lessees who occupy the building.

In other cases, the services provided are significant. For example, if an entity owns and manages a hotel, services provided to guests are significant to the arrangement. Therefore, an owner-managed hotel is owner-occupied property, rather than investment property.

It may be difficult to determine whether ancillary services are so significant that a property does not qualify as investment property. For example, the owner of a hotel sometimes transfers some responsibilities to third parties under a management contract. The terms of such contracts vary widely. At one end of the spectrum, the owner's position may, in substance, be that of a passive investor. At the other end of the spectrum, the owner may simply have outsourced day-to-day functions while retaining significant exposure to variation in the cash flows generated by the operations of the hotel.

b. On 1 January 2019, Wisteria Bhd purchased a factory for investment purposes. The cost of factory was RM 300 million and is expected to have useful life of 50 years with no salvage value. As at 31 Dec 2019, the market value of building was RM330 million, but as at 31 Dec 2020, it dropped to only RM 290 million.

Based on Fair Value Model, prepare the journal entries to record:

the initial recognition of the factory
fair value gain for the year
fair value loss for the year

Date	Account Title & Explanation	Debit	Credit
1-January-2019	Investment Property	RM 300 Million
	Cash		RM 300 Million

31-December-2019	Investment Property	RM 30 Million
	Gain in Value of Investment Property		RM 30 Million

31-December-2020	Loss in Value of Investment Property	RM 40 Million
	Investment Property		RM 40 Million

jeff jeffy answered 2 years ago

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