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THE QUESTION IS AS FOLLOWS: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.Mike can you please assist me with a question called Aztech,I’m trying to find a proper link to the question but not available all i know is that its from June 2000 UK stream,the question is about how one would value Aztech’s hotels in the financial Statements and second part is about accounting treatment of Aztech’s Aircraft Fleet,doing all these using relevant IAS.the question also appears in a text ” FINANCIAL REPORTING BY DAVID ALEXANDER.Please Help me out