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

Elm Co, a listed entity, holds land for which management has not determined any future use. The finance director suggests classifying it as inventory to avoid recognising fair value fluctuations. Elm has no intention to develop or sell it in the ordinary course of business. What is the appropriate IAS 40 classification, and what is the ethical concern?

The land is investment property, because IAS 40 treats land held for an undetermined future use as held for capital appreciation. Classifying it as inventory merely to avoid fair value volatility would be earnings management and breach the ethical principles of integrity and objectivity.

  1. AInventory, because no future use is determined; there is no ethical concern
  2. BProperty, plant and equipment, because the land is not leased out
  3. CInvestment property, because land held for undetermined future use is deemed held for capital appreciation; choosing inventory to manage earnings would be a lack of integrityCorrect
  4. DInvestment property only if it is leased to a third party; otherwise classification is a free choice

Explanation

IAS 40 states that land held for a currently undetermined future use is regarded as held for capital appreciation, so it is investment property. Inventory applies only to property held for sale in the ordinary course of business. Choosing a classification to manipulate reported earnings conflicts with the ethical principles of integrity and objectivity.

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