A company is most likely to:

A. use a fair value model for some investment property and a cost model for other investment property.

B. change from the fair value model when transactions on comparable properties become less frequent.

C. change from the fair value model when the company transfers investment property to property, plant, and equipment.

Th e following information relates to Questions 23 through 28.37 Melanie Hart, CFA, is a transportation analyst. Hart has been asked to write a research report on Altai Mountain Rail Company (AMRC). Like other companies in the railroad industry, AMRC’s operations are capital intensive, with significant investments in such long-lived tangible assets as property, plant, and equipment. In November of 2008, AMRC’s board of directors hired a new team to manage the company. In reviewing the company’s 2009 annual report, Hart is concerned about some of the accounting choices that the new management has made.

Th ese choices diff er from those of the previous management and from common industry practice. Hart has highlighted the following statements from the company’s annual report:

Statement 1: “In 2009, AMRC spent significant amounts on track replacement and similar improvements.

AMRC expensed rather than capitalized a significant proportion of these expenditures.”

Statement 2: “AMRC uses the straight-line method of depreciation for both financial and tax reporting purposes to account for plant and equipment.”

Statement 3: “In 2009, AMRC recognized an impairment loss of €50 million on a fleet of locomotives.

Th e impairment loss was reported as ‘other income’ in the income statement and reduced the carrying amount of the assets on the balance sheet.”

Statement 4: “AMRC acquires the use of many of its assets, including a large portion of its fleet of rail cars, under long-term lease contracts. In 2009, AMRC acquired the use of equipment with a fair value of €200 million under 20-year lease contracts. Th ese leases were classified as operating leases. Prior to 2009, most of these lease contracts were classified as finance leases.”

Exhibits A and B contain AMRC’s 2009 consolidated income statement and balance sheet. AMRC prepares its financial statements in accordance with International Financial Reporting Standards.

EXHIBIT A Consolidated Statement of Income 2009 2008 For the years ended 31 December € in millions % Revenues € in millions % Revenues Operating revenues 2,600 100.0% 2,300 100.0%

Operating expenses Depreciation (200) (7.7%) (190) (8.3%)

Lease payments (210) (8.1%) (195) (8.5%)

Other operating expense (1,590) (61.1%) (1,515) (65.9%)

Total operating expenses (2,000) (76.9%) (1,900) (82.6%)

37 Item set developed by Christopher Anderson, CFA (Lawrence, Kansas, U.S.A.)

For the years ended 31 December € in millions % Revenues € in millions % Revenues Operating income 600 23.1% 400 17.4%
Other income (50) (1.9%) — 0.0%
Interest expense (73) (2.8%) (69) (3.0%)
Income before taxes 477 18.4% 331 14.4%
Income taxes (189) (7.3%) (125) (5.4%)
Net income 288 11.1% 206 9.0%
EXHIBIT B Consolidated Balance Sheet 2009 2008 As of 31 December € in millions % Assets € in millions % Assets Assets Current assets 500 9.4% 450 8.5%
Property & equipment:
Land 700 13.1% 700 13.2%
Plant & equipment 6,000 112.1% 5,800 109.4%
Total property & equipment 6,700 125.2% 6,500 122.6%
Accumulated depreciation (1,850) (34.6%) (1,650) (31.1%)
Net property & equipment 4,850 90.6% 4,850 91.5%
Total assets 5,350 100.0% 5,300 100.0%
Liabilities and Shareholders’ Equity Current liabilities 480 9.0% 430 8.1%
Long-term debt 1,030 19.3% 1,080 20.4%
Other long-term provisions and liabilities 1,240 23.1% 1,440 27.2%
Total liabilities 2,750 51.4% 2,950 55.7%
Shareholders’ equity Common stock and paid-in-surplus 760 14.2% 760 14.3%
Retained earnings 1,888 35.3% 1,600 30.2%
Other comprehensive losses (48) (0.9%) (10) (0.2%)
Total shareholders’ equity 2,600 48.6% 2,350 44.3%
Total liabilities & shareholders’ equity 5,350 100.0% 5,300 100.0%