(b) Router has a number of film studios and office buildings. The office buildings are in prestigious areas whereas
the film studios are located in ‘out of town’ locations. The management of Router wish to apply the ‘revaluation
model’ to the office buildings and the ‘cost model’ to the film studios in the year ended 31 May 2007. At present
both types of buildings are valued using the ‘revaluation model’. One of the film studios has been converted to a
theme park. In this case only, the land and buildings on the park are leased on a single lease from a third party.
The lease term was 30 years in 1990. The lease of the land and buildings was classified as a finance lease even
though the financial statements purport to comply with IAS 17 ‘Leases’.
The terms of the lease were changed on 31 May 2007. Router is now going to terminate the lease early in 2015
in exchange for a payment of $10 million on 31 May 2007 and a reduction in the monthly lease payments.
Router intends to move from the site in 2015. The revised lease terms have not resulted in a change of
classification of the lease in the financial statements of Router. (10 marks)
Required:
Discuss how the above items should be dealt with in the group financial statements of Router for the year ended
31 May 2007.
