DipIFR Syllabus B. Elements of financial statements - PPE - After Initial recognition - Past Papers ^{5 / 15}

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). You have recently produced the final draft of the financial statements for the year ended 30 September 2016 and these are due to be published shortly. The managing director, who is not an accountant, reviewed these financial statements and prepared a list of queries arising out of the review.

Query Two
The notes to the financial statements say that plant and equipment is held under the ‘cost model’. However, property which is owner occupied is revalued annually to fair value. Changes in fair value are sometimes reported in profit or loss but usually in ‘other comprehensive income’. Also, the amount of depreciation charged on plant and equipment as a percentage of its carrying amount is much higher than for owner occupied property. Another note says that property we own but rent out to others is not depreciated at all but is revalued annually to fair value. Changes in value of these properties are always reported in profit or loss. I thought we had to be consistent in our treatment of items in the accounts. Please explain how all these treatments comply with relevant reporting standards. (7 marks)

Required:
Provide answers to the queries raised by the managing director.

Note: The mark allocation is shown against each of the four queries above.

Omega is a listed company which prepares financial statements in accordance with International Financial Reporting Standards (IFRS).

(a) On 1 October 2012, Omega purchased some land for $10 million (including legal costs of $1 million) in order to construct a new factory. Construction work commenced on 1 November 2012. Omega incurred the following costs in connection with its construction:

– Preparation and levelling of the land – $300,000.
– Purchase of materials for the construction – $6·08 million in total.
– Employment costs of the construction workers – $200,000 per month.
– Overhead costs incurred directly on the construction of the factory – $100,000 per month.
– Ongoing overhead costs allocated to the construction project using Omega’s normal overhead allocation model – $50,000 per month. 
– Income received during the temporary use of the factory premises as a car park during the construction period – $50,000.
– Costs of relocating employees to work at the new factory – $300,000.
– Costs of the opening ceremony on 31 July 2013 – $150,000.

The factory was completed on 31 May 2013 and production began on 1 August 2013. The overall useful life of the factory building was estimated at 40 years from the date of completion. However, it is estimated that the roof will need to be replaced 20 years after the date of completion and that the cost of replacing the roof at current prices would be 30% of the total cost of the building. At the end of the 40-year period Omega has a legally enforceable obligation to demolish the factory and restore the site to its original condition. The directors estimate that the cost of demolition in 40 years’ time (based on prices prevailing at that time) will be $20 million. An annual risk adjusted discount rate which is appropriate to this project is 8%. The present value of $1 payable in 40 years’ time at an annual discount rate of 8% is 4·6 cents.

The construction of the factory was partly financed by a loan of $17·5 million taken out on 1 October 2012. The loan was at an annual rate of interest of 6%. During the period 1 October 2012 to 28 February 2013 (when the loan proceeds had been fully utilised to finance the construction), Omega received investment income of $100,000 on the temporary investment of the proceeds.

Required: 
Compute the carrying amount of the factory in the statement of financial position of Omega at 30 September 2013. You should explain your treatment of all the amounts referred to in this part in your answer. (14 marks)