Financial Report

(b) Smilton prepares financial statements to 31 March each year. The following events have occurred which are relevant to the year ended 31 March 2020: (i) On 1 April 2019, Smilton purchased a new head office property for $120 million. On 1 April 2019, Smilton leased out the top three floors of the property to a third party on a long-term operating lease. The annual rental receivable by Smilton was $4 million, starting on 31 March 2020. The top three floors of the property were capable of being sold in a separate transaction. On 1 April 2019, the directors of Smilton estimated that the initial cost of the property should be allocated as follows for accounting purposes: $ million Top three floors of building 30 Remainder - buildings component 40 Remainder - land component 50 Total initial cost 120 On 31 March 2020, the property had an estimated total fair value of $128 million. The directors consider that 25% of this fair value was attributable to the top three floors of the property. The directors of Smilton wish to use the cost model for measuring property, plant and equipment and the fair value model for measuring investment property. Smilton depreciates the buildings component of properties over an estimated useful life of 50 years, with no estimated residual value. The rental payable to Smilton on 31 March 2020 was paid in accordance with the terms of the lease. (8 marks) (ii) On 1 April 2019, Smilton purchased a brand from a competitor for an agreed price $100 million. The directors of Smilton believe that the useful life of the brand is indefinite. On 31 March 2020, no reliable estimate of its selling price was available but the directors of Smilton estimated that the value in use of the brand was $110 million. The directors of Smilton wish to use the fair value model for measuring intangible assets whenever permitted by International Financial Reporting Standards. (5 marks) Required: Explain and state how the two events should be reported in the financial statements of Smilton for the year ended 31 March 2020