Compass Limited prepares its financial statements to 31 December each year, and at 31 December 2017 the company owned four properties: North, East, South and West.

On 1 January 2016, Compass Limited acquired North and East, two sites located in out-oftown shopping centres, with the intention of building a multi-screen cinema on each.

Construction on each site commenced on | January 2016 and was completed on 31 December 2016. Details of the costs associated with the construction are as follows:

Compass Limited financed the construction of North and East by issuing a €5 million zero-coupon bond on | January 2016. The bond is redeemable on 31 December 2019 with a one-off payment of €6,802,721. While both properties were brought into use on 1 January 2017, North was retained by Compass Limited for use as a cinema, whereas East was rented commercially to an unrelated company that converted the property to a 10-pin bowling alley.
(Note: this point requires a limited knowledge of IFRS 9 Financial Instruments (Chapter 25). The main point, in the context of IAS 23, is to calculate the interest arising on the debt in ordert o determine the amount of borrowing costs that can be capitalised. It is quite straightforward and is explained in the solution below so that it is not necessary to study Chapter 25 at this stage.)
Compass Limited owns two successful four-star country hotels, South and West, and the company intends to develop this specialist part of its business. These two properties were professionally valued on 1 January 2017, the details of which are as follows:

The buildings element of South and West represent 50% of both the historical cost and revalued amounts, and their remaining useful economic life at 1 January 2017 was 30 years.
It was company policy to record all owned properties at historical cost and to depreciate them over their estimated useful economic life of 50 years on a straight-line basis. However, with effect from 1 January 2017, the directors of Compass Limited have decided to record South and West at valuation in the financial statements. The directors do not intend to obtain valuations for North and East or other non-current assets held by the company.
Requirement

(a) Explain whether Compass Limited is permitted to record South and West at valuation and other non-current assets, including North and East, at depreciated historical cost.

(b) Based on the information provided, show the amounts that should be included in the statements of profit or loss and other comprehensive income of Compass Limited for the years ended 31 December 2016 and 2017 and the statements of financial position as at those dates in respect of the four properties.
(Note: ignore deferred tax consequences.)

Transcribed Image Text:

North East 000 000 Land 1,000 1900 Direct materials 800 700 Direct labour 200 150 Direct overheads 130 120 2,130 1,870