Explain what Is meant by relevance, reliability and comparability and how they make financial Information useful. 10 marks) (b) During the year ended 31 March 2006, Porto experienced the following transactions or events: 0) entered Into a finance lease to rent an asset for substantially the whole of its useful economic life. (ii) a decision was made by the Board to change the company’s accounting policy from one of expensing the finance costs on building new retail outlets to one of capitalizing such costs. He company’s statement of comprehensive Income prepared using historical costs showed a loss from operating Its hotels, but the company Is aware that the increase in the value of its properties during the period far outweighed the operating loss. Explain how you would treat the Items in (l) to (Ill) above in Port’s financial statements and Indicate on which of the Frameworks qualitative characteristics your treatment Is Dates (15 marks) 2.
Elite Leisure is a private limited liability company that operates a single cruise ship. The ship was acquired on 1 October 1996. Details of the cost of the ship’s components and their estimated useful lives are: component (hull, decks etc) fittings 150 original cost ($million) appreciation basis Ship’s fabric 25 years straight-line Cabins and entertainment area 300 12 years straight-line Propulsion system Useful life of 40,000 hours At 30 September 2004 no further capital expenditure had been incurred on the ship.
In the year ended 30 September 2004 the ship had experienced a high level of engine trouble which had cost the company considerable lost revenue and compensation costs. The measured expired life of the propulsion system at 30 September 2004 was 30,000 hours. Due to the unreliability of the engines, a decision as taken in early October 2004 to replace the whole of the propulsion system at a cost of $140 million. The expected life of the new propulsion system was 50,000 hours and in the year ended 30 September 2005 the ship had used its engines for 5,000 hours.
At the same time as the propulsion system replacement, the company took the opportunity to do a limited upgrade to the cabin and entertainment facilities at a cost of $60 million and repaint the ship’s fabric at a cost of $20 million. After the upgrade of the cabin and entertainment area fittings it was estimated that their remaining life as five years (from the date of the upgrade). For the purpose of calculating depreciation, all the work on the ship can be assumed to have been completed on 1 October 2004. All residual values can be taken as nil.