Company XYZ purchases land for $5,000,000. XYZ intends to hold the land for a long term (20 years) and rent the land out to generate income. Under IFRS, at which price is the company allowed to use on its financial reports for the value of the land:
II. The current market price
- I only
- II only
- Either I or II
The first question you should ask here is the
classification of land. Is it PPE (Property, Plant, Equipment) or investment
land? Since it is being used for generating income (rather than for
operations), it is investment land.
How does IFRS allow valuation of investment land? Either
at cost or at market price. XYZ must choose a method and be
consistent with it, but XYZ is allowed to choose either method. Since XYZ is
holding the land for a long time, they may choose to value it at cost so as to
not be affected by market volatility.
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