Good Housing Ltd leased a large residential apartment building from Magnate Ltd. Good Housing Ltd is the head lessee and it generates income by sub-letting apartments to residential tenants and some commercial tenants who operate shops and a restaurant on the ground floor.

The lease has a remaining term of 15 years. The building is likely to last for another 40 years, and the lease might be renewed. Good Housing Ltd recognises a right-of-use asset for the building.

Last year it was discovered that the external cladding on the buildings was a fire hazard but the local government authority did not require renovations to address the problem. Magnate Ltd did not wish to incur the expenditure because it was not mandatory.

Accordingly, at the beginning of the year, Good Housing Ltd engaged builders to replace the external cladding on the building that it leases from Magnate Ltd. Good Housing Ltd incurred costs of $1 500 000 to replace the external cladding with a fire-resistant cladding. There is no prospect of recovering this cost from the lessor, Magnate Ltd.

Required

Please label each part of your response

1. What is the main accounting policy issue in relation to the expenditure for on fire-resistant cladding for the building? (2 marks)

2. Identify a total of two principles or rules that are relevant to the accounting policy issue, stating the source (such as an Accounting Standard and/or the Conceptual Framework) and explain why each principle or rule is relevant.  (3 marks)

3. Describe two different accounting policies to account for the fire-resistant cladding. You may ignore the disclosure component. Label the policies, Policy 1 and Policy 2, respectively. Please do NOT justify your policies in answering this part. Just describe them. (4 marks)

4. Evaluate the policies in terms of how well they satisfy the principles or rules that you identified in part b) and any other relevant principles or rules. (9 marks)

5. Recommend a policy (Policy 1 or Policy 2) and state what information would be disclosed in the notes about the transaction.