Question

On January 1, the company House Luxury bought a property for $550.000.000 (which included all costs of purchase and the cost to bring the real estate in usable condition). The real estate has been leased over the past year to a lessee who has been renting the entire property. The lessee is paying $1250 per sqm a month for the rent. The real estate has been in somewhat a bad condition but the maintenance had been insufficient in recent years and had been reflecting the renting price. Here is an information about the real estate and its operations:

--> The real estate is 3000 square meters

--> The valuation for the real estate at the end of the year 2017 was $550.000.000

--> The valuation for the plot at the end of 2017 was $100.000.000

--> The company has been paying $400.000 for maintance each year.

--> The Chief's executive sister intends to take care of all accounting and office cost because she like accounting

--> The company paid $200.000 in insurance in 2017

--> Useful life of the property is 50-60 years

At the end of 2017 the company, House Luxury contanced the leese and told him his leese-contract was over. It was agreed that the leese would rent the property in 2018 and 2019. At the same the managers for House Luxury had agreed with a contractor to expend the property with a major improvement what will cost $200.000.000 and the contractor intends to begin as soon the property is available at the beginning of 2020. The contractor estimates that it takes about 9 months to finish the work.

House Luxury plans to use the half of the property under it's own business but rent the other half from January 1, 2021 and make 25 year lease and paying $2250 per square meter per month. The management of the company measures it's assets to IFRS or IAS 40.

a) What is the fair value House Luxary's property it was leased to a third party and is defined as an investment property?

b) What is the book value of the real estate at the end of 2017 assuming it is ued for it's own operations?

c) What is the book value of the real estate at the end of 2017 assuming that half of the property is used in it's own operations and the other hald is rented.

Answer 1

under IAS 40 either of the method for valuation of investmnet in properties can be used i.e. fair value or cost model. Once the selected method has to be used consistently.

a.) IFRS 13 guides about calculation of Fair value. While calaculating fair all future expenses and income which can be reliable measured , should be used. In current case all incomes should be, in Year 2018 & 2019 renting income@ 1250, and year 2020 (after consdering no income in intial 9 months) onwards income will be 2250 for 1500 sqm (as half of the property will be used for own purpose), below is the table

	2,018	2,019	2,020	2021 & onwards
Land	3,000	3,000	1,500	1,500
Rate	1,250	1,250	2,250	2,250
No Of Months	12	12	3	12
Total Income	4,50,00,000	4,50,00,000	1,01,25,000	4,05,00,000
Exp
Maint	4,00,000	4,00,000	4,00,000	4,00,000
Insurance	2,00,000	2,00,000	2,00,000	2,00,000
Net Benefit	4,44,00,000	4,44,00,000	95,25,000	3,99,00,000
Capex			2,00,000

Cash flow given in teh above table needs to be discounted at required rate to calculate FMV.

2. Cost of acquistion is known as book value/historical cost value i..e $ 550.000 in the current case.

3.under IAS 40 use of the property has no relavance for detremining the carrying value of the investment. Managetment is free to use either of the valuation methods.