LAND SECURITIES GROUP (A)

Choosing Cost Or Fair Value On Adoption Of IFRS

IM-A | Group 5 | Term 2

Afzalul Haque 19PGPIM005
Anvekchha Malani 19PGPIM009
Avinash Patel 19PGPIM011
Rahul Sharma 19PGPIM033
Shobhit Tyagi 19PGPIM037
Sumit Prasad 19PGPIM045
 INTRODUCTION

• Land Securities is an investment property firm located in U.K.

• In June 2002, the Council of Ministers of EU approved a regulation requiring companies
trading in European exchanges to use IFRS from 1st Jan 2005
• Prior to adoption of IFRS, Land Securities was following U.K. Accounting Standards
(reporting investment properties using revaluation method)
• Adoption of IFRS would require Land Securities to choose between Cost or Fair
Value models to report investment properties
 WHAT ARE INVESTMENT PROPERTIES?

Property purchased with the intention of earning a return on the investment either
through rental income, the future resale of the property, or both

Free Hold Long Leasehold

● Special right granting the full ● Properties held under leases

use of real estate for an
indeterminate time
● 75% of investment
properties of Land Securities
is free hold
with unexpired terms of
generally over 50 years
● 25% of investment
properties of Land Securities
is long lease hold
 ACCOUNTING MODELS
COST MODEL
● Investment properties listed as
cost less accumulated
depreciation and impairment
loss
● Depreciation is charged in the
period in which benefit occurs
● Fair Values must be disclosed in
the footnotes
REVALUATION MODEL
● Investment properties is listed on
the balance sheet at fair value
● Depreciation is not recorded
● Increase / decrease in fair value
is recorded under revaluation
reserve – in equity section of
Balance sheet
● If decrease in fair value exhaust
revaluation reserve, it is
recorded as impairment charge
in income statement
FAIR VALUE MODEL
● Investment properties is listed on
balance sheet at fair value
● Any changes in fair value are
recorded directly to Income
statement
● No revaluation reserve is used,
nor is depreciation recorded
 SSAP 19 – INVESTMENT PROPERTY

• Investment properties be reported using Revaluation Model

• Investment properties is not depreciated (rather revalued each year)
• Listed on Balance Sheet at “Open Market Value”
• Open Market Value - Estimated amount that a property would exchange contracts at
(sell for) between a willing seller and a willing buyer on the date of the valuation
• Changes in value of investment properties be recorded in a revaluation reserve (in
equity section of balance sheet)
• Decrease in value of investment property that exhaust the revaluation reserve is
recorded as impairment loss
 IFRS – IAS 40 INVESTMENT PROPERTY

Investment Property is the property (building) held to earn rentals or for capital
appreciation or both, rather than:
• Use in the production or supply of goods or services or for administrative
purposes
• Sale in the ordinary course of business
Investment property shall be recognized as an asset when and only when:
• It is probable that future economic benefits that are associated with the
investment property will flow to the entity
• The cost of investment property can be reliably measured
 IFRS – IAS 40 INVESTMENT PROPERTY

• Investment properties are reported using either Cost or Fair value model
• Under Cost Model - Investment properties is stated as cost less accumulated
depreciation and any impairment losses. And fair value to be disclosed in footnotes
• Fair Value Model - Investment properties is stated at fair value (similar to open market
value)
• Encourages a firm to use an external appraiser in deriving fair value but
does not require it
 WHY FAIR VALUE IS THE RULE?

• Investment banks and asset managers are accustomed to using fair value in their
day to day activities, so there is a strong motive from their end.
• GAAP profits are defined on a fair value basis and historically managerially
bonuses are recognized based on the GAAP profit numbers. So they also preferred fair
value.
• During Mergers and Acquisitions, pumping up value is always a good thing for the
investment banks which are involved in the process isn't it? So why not fair value
instead of historical value?
 RELEVANCE V/S RELIABILITY

RELEVANCE RELIABILITY

The Financial Accounting Standards Board

The Financial Accounting Standards Board
(FASB) defines relevant information as: (FASB) defines reliable information as:
● An accounting description or
Information that is capable of making a
difference in a decision by helping decision measurement that is verifiable and
makers to form predictions about
representationally faithful
• Outcomes of past, present, and future ● There are 3 basic components that must
events (it has predictive value) or
exist to classify information as reliable:
• To confirm or correct prior expectations ● Verifiable, Faithful Representation &
(it has feedback value)
Neutral
 RELEVANCE

Cost Model Revaluation Model Fair Value Model

Does not consider the effect It not only takes into account It does take into account the
of increase in investment the revaluation of investment revaluation effect on
property value, which is property but also reports the investment property but it
relevant information to revaluation gain through inappropriately reports the
assess the value of statement of changes in revaluation gain through
investment property. equity. profit and loss statement
Therefore, revaluation instead of changes in equity
model provides the most statement.
relevant information.

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.
RELIABILITY
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.
 RECOMMENDED METHOD

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 equipment (PP&E).

Therefore, the best valuation model for Land Securities to record and report its investment
property is Fair value model
THANK YOU