Question

James Inti acquired a block of land on 1 July 2013 at a cost $1.4 million and valued it according to the cost model. Three years on, the management found out that the area where the land was acquired has been contaminated due to a chemical incident.

On 30 June 2015, the management is provided with the following information:

The value in use $1.3 million

Net selling price $1.2 million

REQUIRED

Describe the accounting treatment required under Accounting Standard to record the drop in the value of the land?

                                                                                             

                                                                      

Answer 1

As Per IAS-16, Property, Plant & Equipment, Under Cost Model in case of Subsequent recognization, the asset is carried at cost less depreciation and Impairment. As per IAS-36, Impairment refers to a condition of the asset where the Realizable Value or Value in use of the assets is less than the Carrying Value. In that case, the asset should be reduced from its carrying amount to the recoverable amount in order to have a clear picture of the financials of the Company.

In the Present Case of James Inti who acquires a Block of Land for 1.4 Million, due to some unavoidable circumstances the value of land as on 30 June 2015 is only 1.2 Million as Compared to the Carrying Value of the Land which is 1.3 Million. So in Light of the Discussion above, the same is Termed as Impairment Loss. The Carrying Value of the asset is to be adjusted to bring clarity to the Fair Value. The Journal Entry Would be:

Impairment Loss A/c dr 0.1 Million

To Land A/c 0.1 Million

The Impairment Loss will be reflected in statement of Profit and Loss Account and the New Carrying Value of the asset would be 1.2 Million