CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions – These are questions and answers on IASB Conceptual Framework for Financial Reporting and Investment Property’ according to IAS 40. But these are accounting concepts, what has it to do with taxation? Then, find out in this post. Just read on.

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CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

Now, let’s consider the first questions and answers in this series. This question has “a” and ‘b’ sections.

(a) The IASB Conceptual Framework for Financial Reporting states that, “an entity’s choice of measurement basis and capital measurement concept determine the accounting model to be used in the preparation of financial statements”.

Required:

Explain the capital maintenance concepts identified in the Conceptual Framework.
(6 Marks)

(b) The two fundamental characteristics identified in the IASB’s Conceptual Framework for Financial Reporting are relevance and faithful representation. In order for financial transactions to be presented faithfully in the financial statements, the principle of substance over form should be applied.

Required:

(i) Why is it considered important that the economic substance of a transaction be reflected in the financial statements rather than its legal form? (5 Marks)

(ii) Describe in general terms, two features of a transaction that suggest that the economic substance may differ from its legal form. (4 Marks) (Total 15 Marks)

CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

SOLUTION TO QUESTIONS

(a) Two concepts of capital re discussed under the standard; the financial concept of the capital and the physical concept of the capital.

Under the financial concept of capital maintenance, profit is earned if the net assets at the end of the period exceeds the net assets at the beginning of the period, excluding any distribution to and contributions from owners during the period. Another form of financial concept of financial maintenance concept is the real financial capital maintenance in which constant purchasing power is taken into consideration.

Under the physical capital maintenance concept, profit is earned if the physical productive capacity of the entity or the resources to achieve that capacity at the end of the period exceeds the physical productive capacity at the beginning of the period.

Neither the IASB conceptual framework nor accounting standards require the use of the physical concept of capital maintenance. Almost all entities use the financial maintenance concept but both concepts can provide useful information.

CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

(b) (i) Substance over form is the concept that the financial statements and accompanying disclosures of a business should reflect the underlying realities of accounting transactions rather their legal form. Usually the legal form of a transaction and its economic reality re the same but in some cases the two may differ and give different results if a transaction is structured in such a way that the economic reality differs from the legal form, the accounting must reflect the economic substance. Substance over form ensures that the true intent of a transaction is not hidden. Substance over form may also arise because a transaction is complex which makes it difficult to ascertain the substance of the transaction. It is believed that financial statements prepared in using the principle- based IFRS reflects the substance of transactions.

(ii) Features indicating that the substance of a transaction may differ from its legal form.

  • Transactions may be structured to manipulate the reported results, by reporting assets as expenses or liabilities as revenue.
  • Unusual term in contract of sales of good and services that might affect the assessment of the timing of revenue and costs.
  • Arrangements that serves to divert risk and returns from where it might otherwise be.
  • If two or more transactions re executed together and the combined effect differs from each individual effects e.g. in a sale and lease back transaction.
  • Business arrangements entered into that give disproportionate advantage to one party over another.

CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

EXAMINER’S FINNDINGS:

The examiner explains that Part (a) of the question tests the concepts of capital maintenance as identified in the conceptual framework while part (b) tests candidates’ practical application of the principles of substance over form as it relate to financial transactions.

His findings ar that few of the candidates attempted the question. But even at that, their performance was below average.
He noted that the common mistake was the candidates’ were unable to apply the substance over form principles to relevant financial transactions.
Finally, the advise is that you have to get familiar with all aspects of the Institute’s syllabus for better performance in future examinations.

The Next Questions:

‘Our second question is on Investment Property’ according to IAS 40, and owner-occupied property under IAS 16.

Qt: Rejuvenator Plc. owns a building that it has been using as its head office in Abuja. To reduce costs, the company’s management on December 31, 2019, decided to move the head office to the branch office and has now let out its head office building.

The head office building had an original cost on July 1, 2010 of N375.5million and was being depreciated over 50 years. As at December 31, 2019, an independent valuer assessed the fair value of the head office to be N525.5million.

The entity’s policy is to charge depreciation from the date of acquisition to the date of disposal.

Required:

(a) Explain the meaning of ‘Investment Property’ according to IAS 40 and explain why its accounting treatment is different from that of owner-occupied property. (4 Marks)

(b) Discuss the key differences between the accounting treatments of investment properties under IAS 40 and owner-occupied properties under IAS 16. (5 Marks)

(c) With relevant figures, explain how Rejuvenators Plc’s building should be accounted for in the financial statements during the reporting period ended December 31, 2019.
(6 Marks)
(Total 15 Marks)

CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

SOLUTION TO QUESTION

These are the suggested answers as projected by CITN to the second question.

(a) An investment property is land or buildings (or part thereof) held by the owner to generate rental income or for capital appreciation (or both) rather than for production or administrative purpose. It may also include property held under a lease if used for the same purpose as other investment properties.

The accounting treatment for investment property is different from owner-occupied property as a result of the use the property is put to, whre a property e.g. building is held for rental income generation or capital appreciation or both, it is treated as investment property. Where the same building is used for administrative purposes largely for the production of goods and services, it is treated as owner-occupied that re largely independent of other assets held by an entity.

CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

(b) The revaluation model and fair value model apply to both properties, which is usually a market-based assessment.

Any gain (or loss) over a previous valuation is taken to profit or loss if it relates to an investment property where as for an owner. occupied property, any gain is taken to revaluation reserve through other comprehensive income, the results are accumulated as a component of equity in the statement of changes in equity.

A loss on revaluation of an owner-occupied property is charged to profit or loss. Unless it has a previous surplus in the revaluation reserve, which can be used to offset the loss.

A further difference is that owner-occupied property re usually depreciated after revaluation, whereas investment properties are not depreciated but are revalued at regular intervals.

(c) According to IAS 40. when an owner-occupied property is being transferred to investment property. IAS 16 would apply up to the date of transfer. The property revalued at December 31, 2019 at N525.5m would be deemed to be the fair value of the investment property at the transfer date. Meanwhile, the revaluation would be credited to the revaluation gain of N221.345m and presented through other comprehensive income for the year ended December 31, 2019. The revaluation reserve is presented as a component of equity in the statement of financial position.

 CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

Working:N’000
July 1, 2010 cost of property375,500
Accumulated depreciation 1/7/2010 – 31/12/2019 (9.5/50 x N375.5)(71,345)
Carrying amount at 31/12/2019304,155
Fair value at 31/12/2019525,500
Revaluation surplus221,345

CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

The Examiners Findings:

The Examiner finds out that the question tests candidates understanding of IAS 40. Investment Property and IAS 16 – Property Plant and Equipment. It also tests how to account for each types of properties in the financial statement.


He then observed that few candidates attempted the questions. Notwithstanding, their performance was below average. too. He also observed that the common error was the candidates’ inability to differentiate between investment property and owner-occupied properties.


The advice is that you must read and understand all accounting standards in the syllabus and their practical applications. Insisting that it will help you perform better in future examinations.

CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

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Summing Up on CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions

Finally, CITN Exams Questions on IAS 40 & IASB: How to tackle the Questions, You must have been wondering about the relationship between the accounting concept and taxation. The simple fact is that taxes are based on revenue/turnover. The next factor is the taxable income from where you generate the tax due or tax liability due. So, you see, the taxman must be careful about how these accounting concepts affect the taxable income realizable. Do you catch the fund here? You have been talking with an Economist who is a member of both ICAN and CITN and a practitioner too.

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