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Land Securities Essay

1456 words - 6 pages

Financial Accounting
Homework Case I: Land Securities Group
Should Land Securities choose the cost or fair value model for reporting its investment property in its consolidated financial statements?
a) Explain the financial statement effects of the different models
b) Consider the perspectives of management, (current and potential) shareholders and lenders, as well as auditors
c) Take into account the different objectives of financial reporting
d) Conclude with a well-reasoned decision
-------------------------------------------------

Revaluation Model | | | | | |
Balance Sheet | | | | Income Statement | | |
  | 2002 | 2003 | |   | 2002 | 2003 |
...view middle of the document...

010 |
Accumulated Depreciation | | -96 | | Depreciation of investment property | | 96 |
Total Assets | 8.868 | 5.873 | | | | |
Liabilities | 2.831 | 3.445 | |   | | |
Equity | 6.037 | 2.428 | | Operating Profit | 264 | 134 |
Total Equity | 8.868 | 5.873 | | | | |

Revaluation to Fair Value Model transformation
* Revaluation Reserve in equity will be transferred to retained earnings
* Change in market value of the assets will be stated in the income statement (influence on profit; profit will be higher because market value tends to increase over the time)
* Value of total assets will be the same as in the Revaluation Model
Fair Value Model | | | | | | |
Balance Sheet | | | | Income Statement | | |
  | 2002 | 2003 | |   | 2002 | 2003 |
Investment Properties | | | | Revenues | 1.026 | 1.240 |
Historical Cost | 4.423 | 4.785 | | Net surplus due to revaluation of investment properties | | 24 |
Revaluation Reserve | 3.377 | 3.039 | | | | |
Open Market Value | 7.800 | 7.824 | | Expenses | 762 | 1.010 |
Total Assets | 8.868 | 9.008 | |   | | |
Liabilities | 2.831 | 3.445 | | Operating Profit | 264 | 254 |
Capital and Reserves | | | | | | |
Called-up share capital | 524,3 | 76,9 | | | | |
Share premium account | - | 13,3 | | | | |
Revaluation reserve | 3.376,9 | 0,0 | | | | |
Other reserves | 901,3 | 0,1 | | | | |
Profit and loss account (retained earnings) | 1.234,1 | 5.472,8 | | | | |
Equity | 6.037 | 5.563 | | | | |
Total Equity | 8.868 | 9.008 | | | | |

Objectives of Financial Reporting according to FASB and IASB
Financial statements are prepared according to commonly agreed guidelines. These guidelines are set by the objectives of financial reporting.
The objectives of financial reporting, as discussed in the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Concepts No. 1, are to provide information that:
1. “is useful to existing and potential investors and creditors and other users in making rational investment, credit, and similar decisions;
2. helps existing and potential investors and creditors and other users to assess the amounts, timing, and uncertainty of prospective net cash inflows to the enterprise;
3. identifies the economic resources of an enterprise, the claims to those resources, and the effects that transactions, events, and circumstances have on those resources”

The objectives of financial reporting according to International Accounting Standards Board (IASB) are defined in IAS 1 publication as follows:

“The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions.

Financial statements also show the results of the management’s stewardship of the resources...

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