Ryland Storage Park (RSP) is a publicly held real estate investment trust (REIT) in Canada specializing in storage properties. In general, an REIT is a passive investment company focused on buying and holding quality real estate properties for the long term to generate rental income.

Before the adoption of IFRS, RSP had been classifying its real estate properties as property, plant, and equipment. Under IAS 40 of IFRS, a new category of “investment property” was introduced. The executives at RSP are debating whether it is more appropriate to reclassify the company’s real estate properties as investment properties rather than as property, plant, and equipment. They are also wondering what the immediate impact will be on the financial statements should they switch their assets to the investment properties category.

Required:
a. Suppose you are one of the executives of RSP. Discuss whether the real estate properties would more appropriately be classified as property, plant, and equipment or as investment properties.
b. Assume the real estate market has been burgeoning over the last few years and RSP has been experiencing huge gains on its real estate portfolio. Discuss the immediate financial statement impact of classifying the real estate properties as investment properties instead of property, plant, and equipment.
c. Both IAS 16 and IAS 40 give companies the option of measuring non-current assets’  carrying values using the historical cost basis and an alternative basis. Do you think firms would be more likely to adopt the alternative basis under IAS 16 or under IAS 40? Explain your position.
d. IAS 40 adopts the fair value model as the alternative basis of valuing non-current assets. What do you think are the benefits and shortcomings of the fair value model? Do you think allowing the choice would create more opportunities for financial statement manipulation? Explain your position.