QUESTION 2

The following information is provided for two items of property for a company.

• A factory Cloud10 was purchased five years ago for RM300 000. It was intended to be used to build another factory but the company has now reorganized its original factory and it is no longer required. The company now intends to sell it. The current property market has dropped but is expected to rise when interest rates fall. If sold now the property is expected to realize RM260 000.Real estate experts have predicted that if the company waits for the property market to recover, it could realize RM350 000.

• Cloud9 is the current factory. It was purchased nine years ago for RM180 000. If sold now, it would be expected to realize RM280 000 (and RM400 000 if the property market recovers). The company has various estimates about its contribution to the profit of the company. Using current interest rates and various assumptions about future sales and costs, the property is calculated to have a present value (in terms of future cash flows) of RM700 000. It is insured for RM600 000 because this is the cost required to rebuild it.

• The company has always recorded property using the historical cost basis. Other companies in the same industry have traditionally used the same basis, although about 40% now use the fair value basis.

Required:

1. For each of the properties, identify which cost or value would best meet each of the following qualitative characteristics (consider each separately):

1. Faithful representation
2. Relevance
3. Verifiability
4. Comparability
5. Understandability