Financial accounting assignment.
You are working as a financial accounting adviser and have been approached for advice by the chief executive of Empire Real Estate Investment Trust. On 1 February 2015 Empire spent £300m (including £200m for land) on an office building in Central London near its current head office in East London. At this moment in time the chief executive is unsure as to how the building will be utilised.
Office rents are high, and the value of commercial property in the area is expected to rise sharply in the future. On the other hand the office accommodation at the head office is somewhat dated and it could make sense to utilise the offices for Empire Real Estate Investment Trusts own use. At this stage the chief executive is open minded about the likely usage, but he has asked you to prepare a report addressing the following issues:
a) How should the office buildings be dealt with in the accounts for the year ending 31 December 2015, and subsequent years, if the decision is made to rent the buildings to a third party for a fixed term of 15 years and reconsider use of the buildings as a new Head office when the rental lease comes up for renewal in the future. Your answer should refer to the relevant sections of IAS40, where appropriate.
b) How should the office buildings be dealt with in the accounts for the year ending 31 December 2015, and subsequent years, if the decision is made to use the buildings immediately as office accommodation for Real Estate Investment Trust? Your answer should refer to the relevant sections of IAS16, where appropriate.
In parts (a) and (b) you should assume that property prices are likely to increase sharply over the next few years.
c) If property prices fell significantly in an accounting period, compare and contrast the different treatment of the loss in value adopted by IAS40 fair value model and IAS16.
d) Assuming Empire Real Estate Investment Trust sells the office buildings for a substantial profit in 2020, compare and contrast the treatment of the profit in that year, under IAS16 and IAS40.
In addition to dealing with these four specific points, your report should contain an introduction, outlining the problem as you see it, and a brief conclusion summarising the situation for the chief executive. Marks will be awarded for the style and presentation of the report. (20 marks)
Report to chief executive
Answers should refer to IAS
Any calculation should go the body of the report
Citation not much required but some, where is needed.
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