Land Securities Individual Case Questions
Q1. Assume there are three separate real estate companies: US Realty (which applies the cost model), UK Realty (which applies the revaluation model), and International Realty (which applies the fair value model). Assume also that on December 31, 2003, each company pays £1,000 cash to obtain investment property comprising land with negligible value and an office building worth £1,000. The building has a 10-year useful life, has no residual value, and is expected to provide a constant stream of economics benefit over time.
What is the accounting entry for each company for each of the following four scenarios:
a) On December 31, 2003, at acquisition
b) On December 31, 2004, assuming the investment property fair value is £1,300
c) On December 31, 2005, assuming the investment property fair value is £1,100
d) On December 31, 2006, assuming the investment property fair value is £500
Q2. Which model (cost, revaluation, or fair value) provides the most relevant information? Which model provides the most reliable information? SUPPORT YOUR STATEMENTS - TO RESPOND TO THIS QUESTION YOU WILL NEED UNDERSTAND WHAT THE FIRM DOES I.E., HOW DOES THE FIRM EARN INCOME (THERE ARE TWO PRIMARY SOURCES) AND WHAT IS ITS PRIMARY ASSETS THAT IT USES TO GENERATE THESE SOURCES OF INCOME.
Q3. How does each model affect Land Securities' balance sheet? Income statement? Can the firm assess the impact of adopting the fair value model on previous years' key performance metrics, such as "profit on ordinary activities", how?
Q4. Which model, cost or fair value, would you recommend Land Securities adopt? Why?
Q5. The FASB and IASB are actively seeking to eliminate differences between U.S. and international accounting standards. However, investment properties are reported under the cost model in the U.S., while IFRS allows either the cost or fair value model. Should the FASB also allow the fair value model? Why or why not [BE SPECIFIC, GIVE EXAMPLES OF BENEFITS AND COSTS].