Question

In 1997, XYZ Company purchased several acres of land for $1,000,000. In 2019, the Federal Highway Administration announced that it planned to build an interstate highway, with exit and entrance ramps to be located within a few miles of this property. Based on this information, the appraised value of the property on December 31, 2019, was $25 million.

1. At what value should XYZ Company report this land in its December 31, 2019, balance sheet? Why?
2. Which value is more relevant? Why?
3. Assume that during 2019 the Federal Highway Administration decided not to build the highway. Instead, the state decided to place a landfill adjacent to this property. This reduced the appraised value of the property to $100,000. At what value should XYZ Company report this land in its December 31, 2019, balance sheet? Why?

Answer 1

Hello Buddy,

Well depending on the policy adopted by XYZ Ltd in recording of its PPE, the revaluation treatment should be decided.

Assuming the company adopts revaluation method, wherein it revalues all its PPE, according to IAS 16, Revaluations must be carried out with sufficient regularity so that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date.

With reference to the above points, I now answer your question -

a) The land should be revalued to $25 million.

b) A balance sheet is a statement showing the assets and liabilities. Recording at fair value would be considered more relevant as it would give the users of such statement the accurate picture of the assets and liabilities shown in the statement.

c) The company should then write off the value of assets if that is the case. No matter what, only the rule stated above matters and that is the value shown should not differ materially as compared with the fair value.

I hope the above solution is what you were looking for. For any further queries or doubts in the solution, please feel free to drop a comment. Please do leave a positive feedback, Thank you :)