Accounting question using IAS and IFRS, Pls help

[erasmia]

Astra plc is in the process of preparing its first draft financial statements for the year ended 30 June 2009. The finance director is seeking your advice on the appropriate treatment of the following issues:

Issue 1 - Specialist equipment

The gardening division of Astra plc manufactures gardening tools using modern technology. The division owns an item of specialist manufacturing equipment that cost £1,320,000 on 1 July 2006. The item has been depreciated at 25% per annum using the straight line method on a time apportioned basis. The original estimate of its scrap/residual value was £40,000. On 31 December 2008, a factory lorry ran into the equipment and caused serious structural damage.

Due to the above accident, a review of the economic potential of the equipment was conducted in January 2009 and it was agreed:

• due to the specialist nature of the equipment, replacement parts are not readily available; consequently, it cannot be economically repaired.
• it could still be used, although its capacity had been considerably reduced; its remaining useful life is only two years (from the date of the accident).
• based on its reduced capacity and useful life, the value in use of the equipment was estimated at £240,000.
• the revised estimate of its scrap/residual value is £20,000 and this would be zero in two year's time.
• the company was offered a trade-in allowance of £600,000 against replacement equipment which would cost £4 million.
• the long-term demand for the sole product processed by the equipment is uncertain; therefore there is a reluctance to replace the equipment.
• a condition of the trade-in allowance was that it was only available if the existing equipment was replaced.


Issue 2 - Cash generating unit

The Aqua Drink division of Astra plc extracts and sells bottled water under the "Aqua-Drink" brand name. The division has been very profitable for a long time, but during the past year there have been a number of incidents of contamination of the water supply and complaints of fragments of glass in bottles from defective production plant and machinery. These incidents have inevitably led to adverse press publicity and to the division incurring losses in recent months. The directors are satisfied the sources of the contamination in supply and defects in the plant have now been resolved and there is recent evidence that sales have started to build up again using a new brand name "Ultra-Drink".
The carrying amounts of the division's non-monetary assets at 30 June 2009 are:

£'000

Brand "Aqua-Drink" 12,000
Land (including spa from which water is extracted) 42,000
Purifying and bottling plant (see note (i) below) 14,000
Inventories (see note (ii) below) 10,000
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78,000
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Notes:

(i) Although most of the up-grading work has been completed the directors estimate a further £2 million will need to be spent on the plant.

(ii) Inventories consist of £4 million of "Aqua-Drink" labelled bottles and the remainder as "Ultra-Drink" labelled bottles. Samples of all bottles have been tested by the local trading standards office and deemed fit for sale. However, the "Aqua-Drink" bottles will have to be re-labelled at a cost of £200,000, after which they could be sold for £5 million.

(iii) Based on estimated future cash flows, the directors believe the value in use of the division is £50 million; they have no reliable guide of the fair value less costs to sell of the division.


Issue 3 - Maturing inventory

On 1 July 2008 Astra plc sold maturing inventories of wine, with a carrying value (based on historical cost) of £10 million, to XYZ a subsidiary of the company’s bank, for £18 million. The estimated market value of this wine on 1 July 2008 was £22 million.

The wine will not be ready for sale until 30 June 2013 and will remain on Astra plc's premises until this date. The sale contract with XYZ includes a clause allowing Astra plc to re-purchase the wine at any time up to 30 June 2013, at a price of £18 million plus interest at 10% per annum, compounded from 1 July 2008. In the draft financial statements the proceeds of the sale have been debited to the bank account and credited to revenue.


REQUIRED:

Draft a response to the finance director of Astra plc that explains the treatment of each of the above issues and the amounts to be included in the company’s Income Statement for the year ended 30 June 2009 and the Statement of Financial Position as at that date.