04-15-2007, 11:24 PM
Dear,
In my view the above accounting policy is a bit arbitrary and does not strictly coincide the recognition criteria given in paragraph 7 of IAS 16 i.e. it is probable that economic benefits will flow to the entity (during holding period) and cost could be measured reliably.
Now saying that economic benefits will flow to the entity only in case of additions exceeding Rs 5000 in value appears to be vague. Therefore, this policy requires a debate and professional input. Specially auditors should satisfy theirselves that the accounting estimate regarding matching the threshhold with recognition criteria is suitable or not.
Chairs, tables etc are distinct assets and do not make part of an isolated asset. IAS 16 allows separately capitalizing the parts of an asset where such parts have separate importance, economic jusitification and useful life from the main asset. However, grossing up of seprately identified assets, in this case, does not appear to be justifiable as each chair or table has seprately identified useful life and cost.
Despite the question on fairness of accounting policy under discussion, in my view, the threshhold decided in the accounting policy would be applied on each chair and table seprately. Thus meeting the last option given in your question.
The reason is becoz the policy cannot focuss the transaction value or contract value. Rather, it has to place its focuss on establishing the criteria about an asset i.e. capital expenditure on a particular asset. IAS 16 has no where discussed the transaction level or contract value levels for establishing the recognition critera.
For example what would be the decision for capitalization where such an entity has purchased 10 calculators having Rs.3000 value per calculator and where such caculators are expected to be used for number of years, say 7 years. In my view the threshhold would be applied on one calculator of Rs 3000 rather than on all calculators simultaneously for Rs 30000. If this has to happen then very tiny items (having useful life of more than one year) would be capitalized making part of a whole transaction.
However, wording of policy is not specific and clear and management can mold it in either way to decide what they like.
Therefore, question still remains about the fairness and validity of the policy.
Hope you would find this reply beneficial for you.
Regards,
Kamran.
In my view the above accounting policy is a bit arbitrary and does not strictly coincide the recognition criteria given in paragraph 7 of IAS 16 i.e. it is probable that economic benefits will flow to the entity (during holding period) and cost could be measured reliably.
Now saying that economic benefits will flow to the entity only in case of additions exceeding Rs 5000 in value appears to be vague. Therefore, this policy requires a debate and professional input. Specially auditors should satisfy theirselves that the accounting estimate regarding matching the threshhold with recognition criteria is suitable or not.
Chairs, tables etc are distinct assets and do not make part of an isolated asset. IAS 16 allows separately capitalizing the parts of an asset where such parts have separate importance, economic jusitification and useful life from the main asset. However, grossing up of seprately identified assets, in this case, does not appear to be justifiable as each chair or table has seprately identified useful life and cost.
Despite the question on fairness of accounting policy under discussion, in my view, the threshhold decided in the accounting policy would be applied on each chair and table seprately. Thus meeting the last option given in your question.
The reason is becoz the policy cannot focuss the transaction value or contract value. Rather, it has to place its focuss on establishing the criteria about an asset i.e. capital expenditure on a particular asset. IAS 16 has no where discussed the transaction level or contract value levels for establishing the recognition critera.
For example what would be the decision for capitalization where such an entity has purchased 10 calculators having Rs.3000 value per calculator and where such caculators are expected to be used for number of years, say 7 years. In my view the threshhold would be applied on one calculator of Rs 3000 rather than on all calculators simultaneously for Rs 30000. If this has to happen then very tiny items (having useful life of more than one year) would be capitalized making part of a whole transaction.
However, wording of policy is not specific and clear and management can mold it in either way to decide what they like.
Therefore, question still remains about the fairness and validity of the policy.
Hope you would find this reply beneficial for you.
Regards,
Kamran.
