Investors Galore Inc., a listed company in Germany, ventured into construction of a mega shopping mall in south Asia, which is rated as the largest shopping mall of Asia. The company’s board of directors aftermarket research decided that instead of selling the shopping mall to a local investor, who had approached them several times during the construction period with excellent offers which he progressively increased during the year of construction, the company would hold this property for the purposes of earning rentals by letting out space in the shopping mall to tenants. For this purpose it used the services of a real estate company to find an anchor tenant (a major international retail chain) that then attracted other important retailers locally to rent space in the mega shopping mall, and within months of the completion of the construction the shopping mall was fully let out.
The construction of the shopping mall was completed and the property was placed in service at the end of 20X1. According to the company’s engineering department the computed total cost of the construction of the shopping mall was $100 million. An independent valuation expert was used by the company to fair value the shopping mall on an annual basis. According to the fair valuation expert the fair values of the shopping mall at the end of 20X1 and at each subsequent year-end thereafter wereThe independent valuation expert was of the opinion that the useful life of the shopping mall was 10 years and its residual value was $10 million.
What would be the impact on the profit and loss account of the company if it decides to treat the shopping mall as an investment property under IAS 40 (a) Using the “fair value model”; and (b) Using the “cost model.” (Since the rental income for the shopping mall would be the same under both the options, for the purposes of this exercise do not take into consideration the impact of the rental income from the shopping mall on the net profit or loss for the period).
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