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ACCA Strategic Professional · Strategic Business Reporting (International) · Non-current assets

Castle plc owns 80% of Dune Co. Dune owns a building that it leases to Castle, which uses it as its head office. In Dune's individual financial statements the building is classified as investment property under the fair value model; fair value is $5.0m, up from $4.6m at the start of the year. How should this be treated in the consolidated financial statements?

In the consolidated statements the building must be reclassified to property, plant and equipment under IAS 16 and the $0.4m fair value gain reversed. The property is used by a group member, so from the group's viewpoint it is owner-occupied and falls outside IAS 40.

  1. AKeep as investment property at fair value, with a $0.4m gain in group profit or loss
  2. BReclassify as property, plant and equipment under IAS 16, reverse the $0.4m gain, and charge depreciation on a cost or revaluation basisCorrect
  3. CKeep as investment property but recognise the $0.4m gain in OCI
  4. DEliminate the building from the consolidated statement of financial position

Explanation

From the group's perspective the property is owner-occupied, because it is used by a group entity. IAS 40 excludes owner-occupied property, so the consolidation adjusts it to IAS 16: the fair value gain in profit or loss is reversed and depreciation is charged (or a revaluation policy applied). Rent between group entities is eliminated. The building is not removed from the statement as it is still a group asset.

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