IAS 16 Aztech

Aztech, a
public limited company manufactures and
operates a fleet of small aircraft. It
draws up its financial statements to 31 March
each year,
Aztech also owns a small chain of hotels
(carrying value of £16 million), which are used
in
the sale of holidays to the public. It is the
policy of the company not to provide
depreciation
on the hotels as they are maintained to a high
standard and the economic lives of the hotels
are
long (20 years remaining life). The hotels are
periodically revalued and on 31 March 2000,
their existing use value was determined to be
£20 million, the replacement cost of the hotels
was £16 million and the open market value was
£19 million. One of the hotels included above
is surplus to the company’s requirements as at
31 March 2000. This hotel had an existing use
value of £3 million, a replacement cost of £2
million and an open market value of £2.5
million,
before expected estate agents and solicitors
fees of £200 000. Aztech wishes to revalue the
hotels
as at 31 March 2000. There is no indication of
any impairment in value of the hotels.
The company has recently finished
manufacturing a fleet of five aircraft to a new
design.
These aircraft are intended for use in its own
fleet for domestic carriage purposes. The
company
commenced construction of the assets on 1
April 1998 and wishes to recognise them as
fixed assets as at 31 March 2000 when they
were first utilised. The aircraft were completed
on 1 January 2000 but their exterior painting
was delayed until 31 March 2000.
The costs (excluding finance costs) of
manufacturing the aircraft were £28 million and
the company has adopted a policy of
capitalising the finance costs of manufacturing
the aircraft.
Aztech had taken out a three year loan of £20
million to finance the aircraft on 1 April
1998. Interest is payable at 10% per annum but
is to be rolled over and paid at the end of the
three year period together with the capital
outstanding. Corporation tax is 30%.
During the construction of the aircraft, certain
computerised components used in the
manufacture fell dramatically in price. The
company estimated that at 31 March 2000 the
net realisable value of the aircraft was £30
million and their value in use was £29 million.
The engines used in the aircraft have a three
year life and the body parts have an eight
year life; Aztech has decided to depreciate the
engines and the body parts over their different
useful lives on the straight line basis from 1
April 2000. The cost of replacing the engines on
31 March 2003 is estimated to be £15 million.
The engine costs represent thirty per cent of
the total cost of manufacture.
The company has decided to revalue the aircraft
annually on the basis of their market
value. On 31 March 2001, the aircraft have a
value in use of £28 million, a market value of
£27 million and a net realisable value of £26
million. On 31 March 2002, the aircraft have a
value in use of £17 million, a market value of
£18 million and a net realisable value of £18.5
million. There is no consumption of economic
benefits in 2002 other than the depreciation
charge. Revaluation surpluses or deficits are
apportioned between the engines and the body
parts on the basis of their year end carrying
values before the revaluation.
Required:
(i) Describe how the hotels should be valued in
the financial statements of Aztech on
31 March 2000 and explain whether the current
depreciation policy relating to the
hotels is acceptable under IAS 16 PPE. (6
marks)
(ii) Show the accounting treatment of the
aircraft fleet in the financial statements on the
basis of the above scenario for the financial
years ending on:
(a) 31 March 2000. (4 marks)
(b) 31 March 2001, 2002. (6 marks)
(c) 31 March 2003 before revaluation.