Exam questions and examples.
Example 1: Fair Value Model – Gain in Value
Scenario
XYZ Ltd. purchases a commercial office building for $800,000 on January 1, 2024. The
company intends to rent it out, so it classifies it as investment property under IAS 40.
By December 31, 2024, the market value of the property increases to $900,000.
Accounting Treatment
✅ Initial Recognition (at Cost) – January 1, 2024
Dr. Investment Property $800,000
Cr. Cash/Bank
$800,000
(The investment property is recorded at its purchase cost.)
✅ Revaluation to Fair Value – December 31, 2024
Since XYZ Ltd. uses the Fair Value Model, the increase of $100,000 ($900,000 - $800,000) is
recorded as a gain in profit or loss.
Dr. Investment Property $100,000
Cr. Fair Value Gain (P&L) $100,000
(The fair value increase is recognized as income in the income statement.)
✅ Balance Sheet Impact (December 31, 2024)
●
●
Investment Property: $900,000
Fair Value Gain (Profit & Loss): $100,000
Example 2: Cost Model – Depreciation
Scenario
DEF Ltd. purchases a warehouse for $600,000 on January 1, 2024 and decides to use the
cost model instead of the fair value model.
●
The warehouse has a useful life of 30 years.
●
The company will use straight-line depreciation.
Accounting Treatment
✅ Initial Recognition (at Cost) – January 1, 2024
Dr. Investment Property $600,000
Cr. Cash/Bank
$600,000
(The warehouse is recorded at cost.)
✅ Annual Depreciation – December 31, 2024
Depreciation per year = $600,000 ÷ 30 years = $20,000
Dr. Depreciation Expense $20,000
Cr. Accumulated Depreciation $20,000
(The property is depreciated annually.)
✅ Balance Sheet Impact (December 31, 2024)
●
●
●
Investment Property (Cost): $600,000
Less: Accumulated Depreciation: ($20,000)
Net Carrying Amount: $580,000
In this model, property does not change in value unless there is an impairment or revaluation
under IAS 16.
Key Differences Between the Two Models:
Feature
Fair Value Model
Cost Model
Valuation
Adjusted to market price
annually
Held at original cost minus
depreciation
Gains/Losses
Recorded in profit or loss
Not recorded unless impaired
Depreciation
No depreciation charged
Depreciation applied annually
Example 3: Transfer from Owner-Occupied Property to Investment Property
Scenario
LMN Ltd. owns an office building used as headquarters (classified as PPE under IAS 16). On
January 1, 2024, the company relocates its operations and decides to rent out the building
instead. Since the use has changed, it must be reclassified as investment property under
IAS 40.
●
●
The carrying amount of the building under IAS 16 (before transfer) is $900,000.
The fair value of the building at transfer date is $1,000,000.
Accounting Treatment
✅ Step 1: Revaluation Before Transfer (IAS 16 Rules Apply)
Before transferring, LMN Ltd. must revalue the building to fair value and record the gain in
other comprehensive income (OCI).
Dr. Building (PPE) $100,000
Cr. Revaluation Surplus (OCI) $100,000
(The building is adjusted to fair value before transfer.)
✅ Step 2: Transfer to Investment Property (IAS 40 Rules Apply)
Now, the building is reclassified as investment property at its fair value ($1,000,000).
Dr. Investment Property $1,000,000
Cr. Building (PPE)
$1,000,000
(The building is now classified under IAS 40 at fair value.)
✅ Balance Sheet Impact (January 1, 2024)
●
●
Investment Property (IAS 40): $1,000,000
Revaluation Surplus (OCI): $100,000
Example 4: Transfer from Inventory to Investment Property
Scenario
XYZ Ltd. is a real estate company that develops apartments for sale (classified as inventory
under IAS 2). However, on January 1, 2024, due to low market demand, the company decides
to rent out some apartments instead of selling them. As a result, these apartments must be
reclassified as investment property under IAS 40.
●
The apartments were initially recorded as inventory at $500,000.
●
On the transfer date, their fair value is $600,000.
Accounting Treatment
✅ Step 1: Reclassify Inventory to Investment Property at Fair Value
Dr. Investment Property $600,000
Cr. Inventory
$500,000
Cr. Gain on Transfer (P&L) $100,000
(The apartments are transferred to investment property at fair value, and the gain of $100,000 is
recorded in profit or loss.)
✅ Balance Sheet Impact (January 1, 2024)
●
●
Investment Property: $600,000
Gain on Transfer (Profit & Loss): $100,000
Summary of Transfers Under IAS 40
Transfer Type
Measurement
Where Gain/Loss is
Recognized
PPE → Investment Property
Revalue to fair value
Other Comprehensive
Income (OCI)
Inventory → Investment
Property
Fair value at transfer date
Profit or Loss (P&L)
Investment Property → PPE
Carrying amount at transfer
date
No gain/loss recognized
Investment Property →
Inventory
Fair value at transfer date
Profit or Loss (P&L)
CPA Exam Question on IAS 40 – CPA Exam Question on IAS 40 –
Investment Property
Question:
XYZ Ltd. purchased a commercial building for $1,200,000 on January 1,
2023. The company uses the fair value model for investment property.
At the end of the year (December 31, 2023), an independent valuer
estimates the fair value of the building to be $1,350,000.
Required:
(a) Prepare the necessary journal entries for:
(i) Initial recognition of the investment property.
(ii) Fair value adjustment at year-end.
(b) Show how the investment property will be presented in the statement of
financial position as of December 31, 2023.
Solution
(a) Journal Entries
✅ (i) Initial Recognition (January 1, 2023)
The investment property is initially recognized at cost:
Dr. Investment Property
Cr. Cash/Bank
$1,200,000
$1,200,000
✅ (ii) Fair Value Adjustment (December 31, 2023)
● The fair value increase = $1,350,000 – $1,200,000 = $150,000.
● This increase is recognized as a gain in profit or loss.
Dr. Investment Property
$150,000
Cr. Fair Value Gain (P&L) $150,000
(b) Presentation in the Statement of Financial Position (as of December 31, 2023)
Statement of Financial Position (Extract)
Amount ($)
Non-Current Assets
Investment Property (IAS 40)
1,350,000
✅ The $150,000 gain is recorded in the income statement under "Other
Income" for the year.
Multiple Choice Question (MCQ)
Which of the following best describes how a company should account for
investment property under the fair value model?
(A) Depreciate the property over its useful life and recognize gains only
when sold.
(B) Carry the property at fair value, with gains or losses recognized in
other comprehensive income (OCI).
(C) Carry the property at fair value, with gains or losses recognized in
profit or loss.
(D) Carry the property at historical cost and recognize revaluation gains
only when the asset is sold.
✅ Correct Answer: (C) – Investment property under the fair value model is
carried at fair value, and gains/losses are recognized in profit or loss
Question:
XYZ Ltd. purchased a commercial building for $1,200,000 on January 1, 2023. The company
uses the fair value model for investment property.
At the end of the year (December 31, 2023), an independent valuer estimates the fair value of
the building to be $1,350,000.
Required:
(a) Prepare the necessary journal entries for:
(i) Initial recognition of the investment property.
(ii) Fair value adjustment at year-end.
(b) Show how the investment property will be presented in the statement of financial position as
of December 31, 2023.
Solution
(a) Journal Entries
✅ (i) Initial Recognition (January 1, 2023)
The investment property is initially recognized at cost:
Dr. Investment Property
Cr. Cash/Bank
$1,200,000
$1,200,000
✅ (ii) Fair Value Adjustment (December 31, 2023)
●
●
The fair value increase = $1,350,000 – $1,200,000 = $150,000.
This increase is recognized as a gain in profit or loss.
Dr. Investment Property $150,000
Cr. Fair Value Gain (P&L) $150,000
(b) Presentation in the Statement of Financial Position (as of December 31, 2023)
Statement of Financial Position (Extract)
Amount ($)
Non-Current Assets
Investment Property (IAS 40)
1,350,000
✅ The $150,000 gain is recorded in the income statement under "Other Income" for the year.
Multiple Choice Question (MCQ)
Which of the following best describes how a company should account for investment property
under the fair value model?
(A) Depreciate the property over its useful life and recognize gains only when sold.
(B) Carry the property at fair value, with gains or losses recognized in other comprehensive
income (OCI).
(C) Carry the property at fair value, with gains or losses recognized in profit or loss.
(D) Carry the property at historical cost and recognize revaluation gains only when the asset is
sold.
✅ Correct Answer: (C) – Investment property under the fair value model is carried at fair
value, and gains/losses are recognized in profit or loss.
CPA Exam Question on Disposal of Investment Property (IAS 40)
Question:
ABC Ltd. purchased an office building on January 1, 2020, for $900,000. The company uses
the fair value model for investment property.
●
●
As of December 31, 2023, the fair value of the building was $1,200,000.
On March 1, 2024, the company sold the building for $1,250,000, incurring transaction
costs of $20,000.
Required:
(a) Prepare journal entries for:
(i) Fair value adjustment as of December 31, 2023.
(ii) Disposal of the investment property on March 1, 2024.
(b) Calculate the gain or loss on disposal and show its treatment in the financial statements.
Solution
(a) Journal Entries
✅ (i) Fair Value Adjustment (December 31, 2023)
●
●
Fair value increase = $1,200,000 – $900,000 = $300,000
Recognized in profit or loss under fair value gains.
Dr. Investment Property
$300,000
Cr. Fair Value Gain (P&L)
$300,000
✅ (ii) Disposal of Investment Property (March 1, 2024)
●
●
●
●
●
Selling price = $1,250,000
Less transaction costs = $20,000
Net sale proceeds = $1,230,000
Carrying amount (fair value) at disposal = $1,200,000
Gain on disposal = $1,230,000 - $1,200,000 = $30,000
Journal Entry for Disposal:
Dr. Cash/Bank
$1,250,000
Dr. Transaction Costs
$20,000
Cr. Investment Property
$1,200,000
Cr. Gain on Disposal (P&L) $30,000
Cr. Cash (Transaction Costs) $20,000
(b) Calculation of Gain/Loss on Disposal
Particulars
Amount ($)
Selling Price
1,250,000
Less: Transaction Costs
(20,000)
Net Proceeds
1,230,000
Less: Carrying Amount
(1,200,000)
Gain on Disposal
30,000
✅ The $30,000 gain is reported in the income statement under "Other Income".
Multiple Choice Question (MCQ) on Disposal
A company using the fair value model sells an investment property. How is the disposal
recorded in the financial statements?
(A) The difference between the sale proceeds and carrying amount is recognized in profit or
loss.
(B) The sale proceeds are recognized in other comprehensive income (OCI).
(C) The carrying amount is written off against retained earnings.
(D) The disposal is recorded without recognizing any gain or loss.
✅ Correct Answer: (A) – Under the fair value model, the gain or loss on disposal is
recognized in profit or loss.
Congratulations!!
The end.
By Teacher Sue.