Land Securities Group (A): Choosing Cost or Fair Value on Adoption of IFRS Harvard Case Solution & Analysis

Land Securities

Q1.) What is the accounting entry for each company for the following four scenarios?

a) On December 31, 2003, at acquisition

b) On December 31, 2004, assuming the investment property fair value is 1,300 pounds

c) On December 31, 2005, assuming the investment property fair value is 1,100 pounds

Please refer attached spreadsheet for details.

Q2. Which model (cost, revaluation, or fair value) provides the most relevant information? Which model provides the most reliable information?

Relevance

Cost Model

Cost model does not consider the effect of increase in investment property value, which is relevant information to assess the value of investment property.

Revaluation Model

Revaluation model not only takes into account the revaluation of investment property but also reports the revaluation gain through statement of changes in equity. Therefore, revaluation model provides the most relevant information.

Fair Value Model

Fair value model does take into account the revaluation effect on investment property but it inappropriately reports the revaluation gain through profit and loss statement instead of changes in equity statement.

Reliability

Cost Model

In terms of reliability of the value of investment property, cost model is most appropriate as it is based on the actual cost which is paid at the acquisition of the investment property.

Revaluation and Fair Value Model

Valuation of investment property is based on the estimates and of similar investment property values in the market, which may be different from the actual value of the investment property. Although, it is relevant to revalue the investment property however it will not be a reliable value due to dependency on the market information.

Q2.) How does each model affect Land Securities' balance sheet? Income Statement? Can the firm assess the impact of adopting the fair value model on previous years' key performance metrics, such as 'profit on ordinary activities'?

Effects of Each Model on Balance Sheet and Income Statement

Cost Model

Investment property is recorded at cost less accumulated depreciation with no recognition given to the revaluation in investment property and a steady charge is made to income statement based on economic benefits occurring to the organization over the useful life of investment property.

Revaluation Model

Investment property is recorded at revalued amount which is the market value of investment property as at that date and allowance for depreciation is deducted from investment property. On the other hand, revaluation gain is recorded in equity through statement of changes in equity and a steady charge of revalued amount is recorded to income statement based on economic benefits occurring to the organization over the remaining useful life of investment property.

Fair Value Model

Investment property is recorded at revalued amount which is the market value of investment property as at that date and allowance for depreciation is deducted from investment property, on the other hand revaluation gain is recorded in profit loss statement under statement of other comprehensive income and a steady charge of revalued amount is made to income statement based on economic benefits occurring to the organization over the remaining useful life of investment property.

Impact of Fair Value Model on Operating Profit

Since, in fair value model revaluation gain is recorded in profit and loss statement through other comprehensive income hence; it does not impact the profit from ordinary activities.

Q3.) Which model would you recommend Land Securities to adopt? Why?

It is recommended to adopt fair value model to record its investment in properties. Although, the best model is revaluation model based on the reporting of true and fair valued of profit and loss statement and balance sheet, however; the revaluation model is used for the reporting and recording of fixed asset, such as property plant and equipments (PP&E). Therefore, the best valuation model for Land Securities to record and report its investment property is fair value model.................

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UK real estate firm, required for the adoption of international accounting standards (IAS), the year 2005 should change the reporting of its core assets (real estate investment) from the revaluation model under UK GAAP or the value or the fair value model in accordance with IFRS. This will have a number of implications for European investments in real estate companies, including Land Securities. "Hide
by Edward J. Riedl Source: Harvard Business School 14 pages. Publication Date: August 31, 2004. Prod. #: 105014-PDF-ENG

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