Not sure why I was wrong

Barry
Barry Registered Posts: 101 Dedicated contributor ๐Ÿฆ‰
This week we did a question at college. It said:

Loogarts financial statements are being prepared to 30 June 20X6. On 20 June 20X6 Loogart moved into new premises and put their existing premises up for sale. Loogart directors have not charged deperciation on the old building.

Discuss the appropriateness of this decision.

I said that it was wrong because the company still owned the building but my tutor said that was the wrong answer but did not tell me why I was wrong:blushing: When I asked he just said "go back to your books" and walked out the room. I am studying DFS.

Can someone help me please.

Comments

  • AdamR
    AdamR Registered Posts: 668 Epic contributor ๐Ÿ˜
    This may be something to do with IFRS 5: Non-current assets held for sale & discontinued operations. Steve may be able to give you more information as I've got to be elsewhere and so don't have time, but that's where I'd start.

    Hope this helps,
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor ๐Ÿ˜
    Hi Barry,

    "Go back to your books" is not constructive advice from a tutor and certainly does not help you in the revision process. Your tutor is paid to provide a service and you (or your employer) has paid to receive a service. Sometimes I am horrified when I hear student's stories about their experiences with tutors.

    Loogart owned a building at the balance sheet (the reporting) date. However, on the assumption that at the balance sheet date, in respect of the old building:

    - management committed to a plan to sell the old building;
    - they are actively trying to find a buyer for the old building;
    - the building is available for immediate sale;
    - the sale is highly probable; and
    - the sale is expected to complete within 1 year

    then the provisions of IFRS 5 (as correctly pointed out by AdamR) will prevail over the provisions of IAS 16 (Property, Plant and Equipment).

    Under the provisions of IFRS 5, an alternative treatment for the building happens. Under IFRS 5, the asset is classed as 'held for sale' and is not depreciated - but why I hear you ask?

    Non-current assets held for sale are not depreciated, instead they are measured at the LOWER of the carrying amount in the balance sheet and fair value, less costs to sell.

    Also remember that depreciation is essentially a method of writing off an asset over its useful economic life due to 'consumption'. Loogart have vacated the premises, so they are not 'consuming' the asset. This is the reason why it will be stated at the measurement basis above (lower of carrying amount and FV less costs to sell).

    Best wishes
    Steve
  • Barry
    Barry Registered Posts: 101 Dedicated contributor ๐Ÿฆ‰
    Thank you Adam I'll have a look.:thumbup1:
    Baz
  • Barry
    Barry Registered Posts: 101 Dedicated contributor ๐Ÿฆ‰
    Hi Barry,

    "Go back to your books" is not constructive advice from a tutor and certainly does not help you in the revision process. Your tutor is paid to provide a service and you (or your employer) has paid to receive a service. Sometimes I am horrified when I hear student's stories about their experiences with tutors.

    Loogart owned a building at the balance sheet (the reporting) date. However, on the assumption that at the balance sheet date, in respect of the old building:

    - management committed to a plan to sell the old building;
    - they are actively trying to find a buyer for the old building;
    - the building is available for immediate sale;
    - the sale is highly probable; and
    - the sale is expected to complete within 1 year

    then the provisions of IFRS 5 (as correctly pointed out by AdamR) will prevail over the provisions of IAS 16 (Property, Plant and Equipment).

    Under the provisions of IFRS 5, an alternative treatment for the building happens. Under IFRS 5, the asset is classed as 'held for sale' and is not depreciated - but why I hear you ask?

    Non-current assets held for sale are not depreciated, instead they are measured at the LOWER of the carrying amount in the balance sheet and fair value, less costs to sell.

    Also remember that depreciation is essentially a method of writing off an asset over its useful economic life due to 'consumption'. Loogart have vacated the premises, so they are not 'consuming' the asset. This is the reason why it will be stated at the measurement basis above (lower of carrying amount and FV less costs to sell).

    Best wishes
    Steve

    steve you are like a walking book. I now fully understand where i went wrong just by your explanation. Thank you so much you are a legend:thumbup:

    we are going to put in a complaint at our college because none of us are happy with our tutor. i wish we had you to teach us all this Steve:001_smile: you would run rings round my tutor!

    Baz
  • Barry
    Barry Registered Posts: 101 Dedicated contributor ๐Ÿฆ‰
    Steve just a thought what if Loogart still occupied the building but it was up for sale would this affect my answer as this is where i was thinking.
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor ๐Ÿ˜
    Well yes it would affect your answer because Loogart are still occupying the building, so depreciation should still continue under the provisions of IAS 16 because IFRS 5 cannot apply as the building is not available for IMMEDIATE sale. All the criteria I cited per IFRS 5 have to be met in order for the provisions to be triggered. If any are not met, the provisions in IAS 16 will then apply.

    Best wishes
    Steve
  • reddwarf
    reddwarf Registered Posts: 528 Epic contributor ๐Ÿ˜
    I've upped this as it may be useful.
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