Seminar 8. Land Securities Group - Case

Questions for seminar presentations and discussions

Assume there are three separate real estate companies: US Realty (which applies the cost model), US 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 economic benefits over time.

What is the accounting entry for each company for 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

Using the above illustrations, as well as Exhibit 10 as references, what financial analysis challenges arise as a result of these differing accounting models?

1- Which model (cost, revaluation, or fair value) provides the most relevant information? Which model provides the most reliable information?

2- 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?

3- Which model, cost or fair value, would you recommend Land Securities adopt? Why?

4- The FASB and IASB are actively seeking to eliminate the differences between US and international accounting standards. However, investment properties are reported under the cost model in U.S., while IFRS allows either cost or fair value model. Should the FASB allow the fair value model?

* references including Exhibit 10

https://drive.google.com/open?id=0B_fxVZsZ9C60V2JKbHFuSE9JUDQ