Question regarding the Fair Value Model (and a question on it on the CFAI)
the question basically asks when the company would most likely change from the fair value model (I guess implicitly this means transferring to the cost model)
two options that are confusing are
Company would most likely…
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 equiptment
According to the answers, the most likely option seems to be c), but i fail to understand why option b) would not be an equally good reason to change from the fair value model to the cost model, as doesn’t IFRS only allow firms to adopt the fair value model (when valuing investment property) if a fair value for the property can be established reliably?
And doesn’t less and less transactions on comparable properties mean it will be harder to determine the fair value of your investment property or is that a stretch?
thanks in advance!
could someone possibly help explain why b) wouldn’t be a good enough reason to change from fair value model to cost model? still perplexed by this i have no accounting or finance background so am finding all this very difficult and challenging :(. thnaks in advance for the upcoming help!
The main reason for the usage of terms like “most likely” is because they’re very close options to each other and the reason why it is confusing.
First of all, if option B were an “equally” good reason it wouldn’t be there as an option due to the existence of term like most likely.
So the reason why option C becomes most likely is because the inside reading in the book says the cost model is the same for investment property as it is for PPE, but the fair value model is different by definition and reporting from the revaluation model for PPE. So if it were already in cost model(IFRS allows cost model or fair value model) it wouldn’t need a change as they’re the same under both PPE and investment property. So the same fair value method under PPE is revaluation method with the above mentioned differences, so moving out from investment property either one(cost model or revaluation model) has to be chosen. It kind of becomes compulsary thus making it most likely.
And option B says transaction on “comparables” and fair value model says the particular property’s value should be reliably measured on a continuous basis. Where which the fair value is defined as the price at which that investment property can be exchaned between knowledgeable, willing parties in an arm’s length transaction.