Roth Sihakneath 2024-08-14

20/20p
1.
(a) An assistant of yours has been criticised over a piece of assessed work that he produced
for his study course for giving the definition of a non-current asset as ‘a physical asset of
substantial cost, owned by the company, which will last longer than one year’.

Required:
Provide an explanation to your assistant of the weaknesses in his definition of non-current
assets when compared to the International Accounting Standards Board (IASB) view of
assets. (8 marks)
Answer:

There are four elements to the assistant's definition of non-current asset and he was
incorrect in all respect of them.
Non-current asset normally includes tangible assets and certain investments. The term
'physical asset' would specifically apply to tangible assets only.
While it is usually the case that most non-current asset is relatively of high value, it is not
the defining aspect of a non-current asset. A waste trash bin may exhibit the characteristics
of a non-current asset but on the ground of materiality it is unlikely to be treated as such.
Furthermore, past cost of asssets should be irrelevant, no matter how much it has cost, it is
the expectation of future economic benefits that defines an asset according to IASB's
framework of presentation and preparation of financial statement.
The concept of ownership is no longer the critical aspect for the definition of non-current
assets. It is probably the case that most non-current assets reported in the entity's statement
of financial position, are owned by the entity, however, it is the ability to "control"
(including preventing others from having access to them) that defines the asset. For
example, we treat lease as an asset of the leasee rather than the lessor.
It is also true that most non-current assets will be used by the entity for more than one year
and a part of the definition of property, plant, and equipment. IAS 16 property, plant, and
equipment refers that non-current assets are tangible assets which are expected to be used
during more than one year, it is not necessarily not always the case. Some non-current
assets may be acquired and proves to be unsuitable for the entity's intended use or is
damaged by an accident. In this case, it is unlikely that they will be used for more than one
year, but they would still be reported a non-current asset during the time they were in use.
Non-current assets may be within one year of the end of its useful life and would still be
reported as a non-current asset if it was still giving economic benefits. Another defining
aspect of an asset is the intended use ie. held for use in production, for supply of good or
service, for rental to others or for administrative purposes.
377 words
Note: the mark allocation is shown against each of the three items above. 8/8p

2.
(b) The same assistant has encountered the following matters during the preparation of the
draft financial statements of Darby for the year ending 30 September 20X9. He has given an
explanation of his treatment of them.

(i) Darby spent $200,000 sending its staff on training courses during the year. This has already
led to an improvement in the company’s efficiency and resulted in cost savings. The organiser
of the course has stated that the benefits from the training should last for a minimum of four
years. The assistant has therefore treated the cost of the training as an intangible asset and
charged six months’ amortisation based on the average date during the year on which the
training courses were completed. (6 marks)

(ii) During the year the company started research work with a view to the eventual
development of a new processor chip. By 30 September 20X9 it had spent $1·6 million on
this project. Darby has a past history of being particularly successful in bringing similar
projects to a profitable conclusion. As a consequence the assistant has treated the expenditure
to date on this project as an asset in the statement of financial position.

Darby was also commissioned by a customer to research and, if feasible, produce a computer
system to install in motor vehicles that can automatically stop the vehicle if it is about to be
involved in a collision. At 30 September 20X9, Darby had spent $2·4 million on this project,
but at this date it was uncertain as to whether the project would be successful. As a
consequence the assistant has treated the $2·4 million as an expense in the statement of profit
or loss. (6 marks)

Required:
For each of the above items (i) and (ii) comment on the assistant’s treatment of them in the
financial statements for the year ended 30 September 20X9 and advise him how they should
be treated under International Financial Reporting Standards (IFRS).
Answer:

i. The expenditure of staff traning may exhibit the characteristics of non-current asset in
that they have and will continue to bring the economic benefits to the entity. However, staff
training cost should not be capitalised as an asset and must be charged as expense in the
income statement. The main reason of this lies with the issue of "control", it's the
employees that have the 'skill' provided by the courses but employees can leave the
company and take these skill with them, or through injury or accident, may be deprived of
those skill. Capitalising staff training is specifically prohibited under IFRS.
Eventhough these cost may bring future economic benefits to the entity, these costs cannot
be separated from the entity or the company remains no legal/contractual right to them.
This is becase the employees can leave the company at any point in time, subject to the
notice period, so the company can not restrict the access of those benefits to others.
ii. The question specifically stated that the cost incurred to date related to the development
of a new processor chip are research costs. IAS 38 Intangible assets states that all research
cost cannot be recognised as an asset in the balance sheet and must be charged as expense
in the income statement. This is because reseach costs are costs of researching to develop
the product and is still in the early stage of the process.Thus, the expected future economic
benefits is so far in the future which does not meet the definition an asset.
In this case, since Darby was already commissioned by a customer, the project should not
be treated as an expense. From Darby's perspective, these costs should be treated as work-
in-progess (current asset). Since Darby was uncertain as to whether the project would be
successful, the project may not be completed. If the project is not completed, he may not
receive the payment from the customer. Darby should check the contract agian. If the
378 words
Note: the mark allocation is shown against each2ofmillion
contract states that, for example, only $ the threecan be above.
items used for research cost, then it12/12p
puts
limit to how much it can be used as work-in-progress. If that's the case, then Darby can
charged $2 million as an expense and only $400,000 as a work-in-progress.