Advise Townsend on the most appropriate treatment in the financial statements for each of the above circumstances.

Note particularly the definitions of income, revenue, gains, and expenses and losses contained either in the Framework or in IAS 18/AASB 118 Revenue.

Terrific Town Houses Ltd is a large company registered in South Australia for the purpose of constructing blocks of home units and town houses. The company conducts its activities in all states. The managing director, Richard Townsend, who is keen to show favourable profit figures, especially profit from operations, is confronted with a number of doubtful issues. He has asked you, the accountant, to clarify the accounting treatment for each of these issues in order to finalise the accounts for the year ended 30 June 2019.

1. Last year, the company acquired land at Kalamunda on the Darling Ranges behind Perth, and had begun construction of 15 town houses on this land. The construction work was three-quarters finished when a bushfire swept through the area on the weekend of 24–25 March 2019. The company had a policy of self-insurance, and estimated that the loss incurred was approximately $2.5 million. Fire danger in the locality of Kalamunda is extremely high during the late summer months every year.

2. Many years ago, the company purchased a large tract of land at Nambucca Heads in New South Wales for $1.5 million, for the purpose of erecting home units. Because of a recession, construction work was delayed. Last November, the company received an offer for the land for $3 million. The offer was considered too good to refuse, and the land was sold at this price on 30 November 2018.

3. The company also holds land at Ipswich in Queensland, which it had purchased some years ago for $600 000. Unfortunately, part of the land subsided because of old coalmines, which were unrecorded by the government as the mines were closed before records were kept. Consequently, the land was regarded as unsuitable for building purposes. The company believes that the land is worth only $300 000 at the end of the reporting period, and it intends to revalue the land down to this recoverable amount.

However, in the Mount Lofty Ranges behind Adelaide, other land held by the company has jumped considerably in value from cost of $800 000 to an estimated $1.2 million. Townsend intends to revalue this land to offset the loss on the downward valuation of the land at Ipswich.

4. Land costing $200 000 was purchased some years ago at Anglesea in Victoria. An application to have the land rezoned for the purpose of constructing town houses was unsuccessful, and the company sold the land for $350 000 on 16 April 2019.

5. The company had acquired, for $2.5 million, a piece of land for construction of an international hotel and casino on the banks of the Tamar River. At that time (2015), the local council was enthusiastically pro-development and the company was given all necessary approvals to commence construction. Construction began in 2016, and costs of $3 million had already been incurred when lobbying by conservationists caused the state government to halt the company’s work on the project in May 2016. The subsequent court case did not favour the company’s arguments for continuation of the project, and the project had to be abandoned in February 2019. The company lost $4 million in sunk costs and legal fees. Townsend suggested that the loss should be written off against retained earnings on the grounds that it was really a loss incurred in the previous financial year when work ceased.