Page 16 - 3. COMPILER QB - INDAS 16

QUESTIONS FROM PAST EXAM PAPERS

Q11. (May 18 – 10 Marks)

Stars Ltd. is a multinational entity that owns three properties. All the three properties were purchased on 1st
April 2016. The details of purchase price and the market values of the properties are given as follows:
Particulars Property 1 Property 2 Property 3
Factory Factory Let-out Building
Purchase Price 30,000 20,000 24,000
Market Value (31-03-2017) 32,000 22,000 27,000
Life 10 years 10 years 10 years
Subsequent Measurement Cost Model Revaluation Model Revaluation Model

Property 1 and 2 are occupied by Stars Ltd, whilst property 3 is let out to a non-related party at a market

rent. The management presents all three properties in the balance sheet as' 'Property, plant and equipment'.
The company does not depreciate any of the properties on the basis that the fair values are exceeding their

carrying amount and recognise the difference between purchase price and fair value in Statement of Profit
and Loss.

Evaluate whether the accounting policies adopted by the Stars Ltd. in relation to these properties is in
accordance with relevant Indian Accounting Standards (Ind AS). If not, advise the correct treatment along

with workings.
SOLUTION

(i) For classification of assets
Ind AS 16 ―Property, Plant and Equipment‖ states that Property, plant and equipment are tangible items
that are held for use in the production or supply of goods or services, for rental to others, or for

administrative purposes.

As per Ind AS 40 ―Investment property‖, investment property is a property held to earn rentals or for
capital appreciation or both, rather than for use in the production or supply of goods or services or for

administrative purposes; or sale in the ordinary course of business.
According to the facts given in the question, since Property 1 and 2 are used as factory buildings, their

classification as PPE is correct. However, Property 3 is held to earn rentals; hence, it should be classified
as Investment Property. Thus, its classification as PPE is not correct. Property 3 shall be presented as a

separate line item as Investment Property as per Ind AS 1.

(ii) For valuation of assets

Ind AS 16 states that an entity shall choose either the cost model or the revaluation model as its
accounting policy and shall apply that policy to an entire class of property, plant and equipment. Also,

Ind AS 16 states that - if an item of property, plant and equipment is revalued, the entire class of
property, plant and equipment to which that asset belongs shall be revalued.

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