Question

On January 1, 2017, SW bought a real estate for $550,000,000 (including all costs of purchase and to put it into a usable condition). The real estate has been leased over the past year to a man who has been renting the entire property and was paying $1,250 per sqm in rent per month. The real estate was in a somewhat bad condition, as the maintenance had been insufficient in recent years, reflected in the rental price. Information about real estate and its operations:

 The real estate is a total of 3,000 square meters
 Real estate valuation at the end of 2017 was $550,000,000
 The valuation for the land at end of 2017 was $100,000,000
 The company has been paying approx. for the last ten years. $400,000 in maintenance on average per year.
 The Chief Executive Officer intends to take care of all accounting and office costs nothing because she is a great bookkeeper.
 The company paid $200,000 in insurance in 2017
 Management estimates that the useful life of the asset would be 50-60 years

By the end of 2017, the management of SW. contacted the lessee and told him they would quit the contraxt. It was agreed that they would rent the property to the man 2018 and 2019 and then he would leave. At the same time, managers had agreed with a contractor to expand the property with a major improvement that will cost $200,000,000 and the contractor intends to launch them as soon as the property is available at the beginning of 2020. The contractor estimates that it takes about 9 months to finish the work. Management plans are to use half of the property under its own business and rent the other half. A lease agreement has been concluded with unrelated parties, ST who plans to take half of the property from January 1, 2021, making a 25-year lease and paying $2,250 per square meter per month. The management of the company is considering whether the asset can be measured at fair value under IFRS (IAS40).

a) What is the fair value of the property if it was leased to third party and is defined as investment property?

b) What is the book value of the real estate at the end of 2017 assuming that is used for its own operations?

c) What is the book value of the real estate at the end of 2017 assuming that half is used in own operations, while the other half is rented?

Answer 1

a) As per IAS 40, the investment property is initally measured at cost plus transaction charges i.e. $550,000,000

At the end of 2017,the fair value of the property if it was leased to third party and defined as investment property, then it is equal to the estate valuation at the end of 2017 i.e.$550,000,000​.

b) If the property is used for its own operations, then it should be accounted as per IAS Property,Plant & Equipment– cost less accumulated depreciation and less accumulated impairment losses.

c) If half of the property is used for owned operations & other half is rented, then:

Value of property used for owned operations at end of 2017 = $550,000,000​/2 = $27,50,00,000.

Value of other half property (rented out) at end of 2017 = Option a) at fair value = $550,000,000​/2 = $27,50,00,000​

Option b) at Cost i.e. $550,000,000​/2 = $27,50,00,000 less accumulated depreciation less accumulated impairment.