International Financial Reporting Standards (IFRS) support the use of fair values when reporting the values of assets wherever practical. This involves periodic re-measurements of assets and the consequent recognition of gains and losses in the financial statements. There are several methods of recognizing gains and losses on re-measurement of assets required by IFRS.
Required:
(a) Advise how IFRS require gains or losses on re-measurement to be dealt with in the financial statements in the case of each of the following assets. The calculation of such gains or losses is not necessary, merely their accounting treatment. Your answer should indicate clearly where in the performance statement each component of gain or loss should appear.
(i) Property, plant & equipment held under the revaluation model of IAS 16.
(ii) Investment property held under the fair value model of IAS 40.
(iii) Financial assets held at fair value under IFRS 9. (4 marks)
(b) In each case (i) and (ii) below, outline briefly the appropriate accounting treatment and show the journal entries in the financial statements of Williamson plc (Williamson) for year ended 31 March 2015, resulting from recording the events described. Any entry affecting the performance statement must be clearly classified as either 'profit or loss' or 'other comprehensive income'. Williamson adopts the revaluation model of IAS 16 Property, Plant & Equipment and the fair value model of IAS 40 Investment Property. Williamson chooses to recognize any fair value gains or losses arising on its equity investments in 'other comprehensive income' as permitted by IFRS 9 Financial Instruments.
(i) Williamson owns a piece of property it purchased on 1 April 2012 for €3.5 million. The land component of the property was estimated to be €1 million at the date of purchase. The useful economic life of the building on this land was estimated to be 25 years on 1 April 2012. The property was used as the corporate headquarters for two years from that date. On 1 April 2014, the company moved its headquarters to another building and leased the entire property for five years to an unrelated tenant on an arms' length basis in order to benefit from the rental income and future capital appreciation. The fair value of the property on 1 April 2014 was €4.1 million (land component €1.9 million), and on 31 March 2015, €4.8 million (land component €2.1 million). The estimate of useful economic life remained unchanged throughout the period. Land and buildings are considered to be two separate assets by the directors of Williamson.
(ii) Williamson holds a portfolio of equity investments the value of which was correctly recorded at €12 million on 1 April 2014. During the year ended 31 March 2015, the company received dividends of €0.75 million. Further equity investments were purchased at a cost of €1.6 million. Shares were disposed of during the year for proceeds of €1.1 million. These shares had cost €0.4 million a number of years earlier but had been valued at €0.9 million on 1 April 2014. The fair value of the financial assets held on 31 March 2015 was €14 million?