Boustead Singapore

[Musicwhiz]

If and when they dispose of depreciated properties, in most cases there will be an extra gain OR they will not be disposed in the first place. Loss in disposal is less likely IMO.

Well, I feel it's not really a case of "extra" gain. It's just a comparison between the Net Book Value (NBV) of a property versus the sale price. The difference is booked as a gain on disposal.

I can illustrate with an example:-

Property costs $50 million, depreciated over 40 years. Depreciation expenses = $1.25 million per year.

Assuming property is sold after 10 years at $60 million. The accumulated depreciation on this property would be $1.25 million X 10 = $12.5 million, so the NBV would be $37.5 million. The sale price minus the NBV would lead to a gain on disposal of $22.5 million.

Bearing in mind that expenses of $1.25 million per annum were already progressively recognized over each of the 10 years prior to the sale. Since the sale price after 10 years is still higher than original cost, it would mean that the gain reflects this higher value and will be recognized as a lump sum in the financial year in which the property was sold. So the true gain would be $22.5 million minus $12.5 million (expense over 10 years) = $10 million.

Hope this explains.

[edragon]

If the word "expenses" is used, would not it be taken as a cost of normal business?; therefore already taken in the P&L for each respective year. This costs (12.5 million) would not be taken into consideration for the accounting year of the disposal. FYI, I am very new to accounting knowing next-to-nothing so forgive me if my understanding is wrong.

[freedom]

Depreciation is part of administrative expenses

[Musicwhiz]

If the word "expenses" is used, would not it be taken as a cost of normal business?; therefore already taken in the P&L for each respective year. This costs (12.5 million) would not be taken into consideration for the accounting year of the disposal. FYI, I am very new to accounting knowing next-to-nothing so forgive me if my understanding is wrong.

Yes, you are correct to say this! I am just giving an example of looking at the property on a project basis, meaning you wish to compute the true profit on this property over the years, hence you would get $10 million in my example. The $12.5 million is "sunk expenses" incurred in prior years.

In year of disposal, only items accounted for are cash received from sale and gain/loss on disposal.

[freedom]

actually if got lease, the gain is much more than 10 million. lease income should be included as well if depreciation is taken out.

[Musicwhiz]

actually if got lease, the gain is much more than 10 million. lease income should be included as well if depreciation is taken out.

Yes, absolutely. Mine was just a very simplistic example.

[freedom]

Hi MW, since we are on the accounting, can I ask you something about the income statement and balance sheet items related to Boustead's DB & L project?

for DB & L, there will not be any revenue/cost/profit from the project before it is completed?

there will be property under development(asset) in the balance sheet for the DB & L project?

Thanks.

[Musicwhiz]

for DB & L, there will not be any revenue/cost/profit from the project before it is completed?

there will be property under development(asset) in the balance sheet for the DB & L project?

Yes, I believe so. Costs incurred for construction will be capitalized as construction-in-progress until the building is completed.

[freedom]

thanks MW.

[freedom]

Boustead accounta its DB & L properties as properties held for sale instead of investment properties in the balance sheet. probably because in the original DB & L agreement, there are options for leasee to acquire the property (similar with IBM technology park). I think the investment properties in the balance sheet is related its own office.

also, properties held for sale is stated at lower of cost and NRV. no depreciation.