Report Writing

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Report Writing
Title:
Date:
For:
By:
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Introduction
As the chief financial consultant, I have to determine the most appropriate use for the
buildings of Conglomerate plc. To do this I have to begin by classifying the category in which
the office buildings fall and how it would then be treated in the income statement. To start with,
the office buildings can be categorized as an investment property because the company had not
yet determined what use they will put the offices. The company was further contemplating the
use of the office buildings as rentals and this would mean that the office buildings are an
investment property. However, where Conglomerate plc used the office buildings for the
company’s own use then this would be the case of an ‘owner-occupier’ and thus the buildings
would be classified as plant, property and equipment (PPE). This classification is important
because the accounting treatment of investment property is governed by IAS 40 while that of
PPE is governed by IAS 16.
a. Accounting treatment of office buildings if they are rented to a third party
The office buildings should be recorded at their fair market value or even at their cost.
The office buildings will fall under the category of investment property since Conglomerate plc
will use them as rentals (Dobruna 2013, p. 101). According to IAS 40 such investment property
will be valued using the fair value model. The fair value model is the price at which
Conglomerate plc would sell the office buildings to a third party at arm’s length. The office
buildings are further categorized as investment property since Conglomerate plc may be holding
the buildings for capital appreciation given that the prices of the office buildings are likely to rise
sharply in the subsequent years. 
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Given that it is clear that the office buildings owned by Conglomerate plc is an
investment property, it will initially be recognized in the accounts as an asset. This means that in
December 31st 2013 when it is initially recorded in the accounts it will be recorded at its
purchase price plus the costs that are directly attributable to the building. According to Greuning
and Koen (2001, p. 156 ) the costs that are directly attributable to the office buildings include
things like the professional fees, the initial handling and the delivery costs, costs of preparing the
site and the assembly and installation costs. However, according to IAS 40 things like the
abnormal costs and the initial operating losses will not be included amongst the directly
attributable costs (Greuning & Terblanche 2011, p. 123). In the case of the office buildings
owned by Conglomerate plc the initial cost will be 35m pounds. This is the cost of constructing
the office building plus the cost of purchasing the land.
In the subsequent years, the reporting entity can record the office buildings at the cost or
fair value model. For instance, in our case we will opt for the fair value model but if an entity
decides to use the cost basis it will mean that the office buildings would be valued at its cost less
any cumulative impairment losses and less the cumulative depreciation. Even so, the entity will
have to give the fair value in line with the requirements of IAS 40.When recording the office
buildings in the subsequent years the changes in the fair value of the office building will be
recognized in the period in which such a change arises (Hussey 2010, p. 258). The IAS is not
particular on where such a change should be recorded but it should be disclosed separately from
the rental income and the direct operating expenses. In this case, Conglomerate plc is likely to
realize an increase in the price of the office buildings and thus the profit should be recorded in
the financial year it was realized.
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b. Accouting treatment if the office buildings are used by Conglomerate plc for its own
accommodation
If Conglomerate plc decides to occupy the office building then it can record the asset
using either the cost basis or the fair value model (Alexander & Jorissen 2007, p. 266). In this
case, the office buildings will be governed by IAS 16 for property, plant equipment because they
are ‘owner-occupied’. To begin with the office building will have to be recognized in the
financial statements because IAS 16 requires that property, plant and equipment needs to be
recognized if the asset’s cost can be reliably measured and the entity will enjoy the economic
benefits of the asset in future. In this case, the cost of the office buildings can be measured
reliably and Conglomerate plc stands to benefit economically from the office buildings. The cost
incurred in constructing the office building and bringing it to its present state will be included
when recognizing the asset (CIMA 2005, P. 273). This cost will include such things as site
preparation and the fees paid to professionals such as engineers and the architects.
So in the financial ye