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Debiting cost of repairs or maintenance of equipment to Plant and equipment is a violation of accounting standard AASB 116

   

Added on  2020-03-02

3 Pages1106 Words127 Views
Solution-1(a)Debiting cost of repairs or maintenance of equipment to Plant and equipment is a violation ofaccounting standard AASB 116 “Property, Plant & Equipment” as it does not meet the recognitioncriteria of standard. Further, it is also a violation of accepted good practice as good practice is to followthe accounting standards and general industry practice is also aligned with accounting standards that isto charge off repairs and maintenance to P&L.As per AASB 116, the cost of an item of property, plant and equipment shall be recognized as an assetif, and only if: (a) it is probable that future economic benefits associated with the item will flow to theentity; and (b) the cost of the item can be measured reliably.”Since, repair and maintenance does not give any future benefits nor they increases the life orproductivity of the assets and are required for upkeep and maintenance of the assets only, that’s why itshould not be added to the cost of assets rather it should be charged off as an expense to the Statementof Profit and Loss account. Manager might be of the view that since it relates to the assets so it should be added to the carryingvalue of the assets. That’s why he added the cost to the asset instead of charging it to the P&L. Secondly,by adding repairs and maintenance cost to the asset it will increase the carrying value of asset andincrease in carrying value will increase the depreciation charged to P&L. Increase in depreciation willreduce the profit to that extent in current year as well as in years to come till the life of the asset. Thisreduced profit will consequently reduce the tax liability of the company. (b)Purchasing Property, Plant & Equipment and debiting its cost to repairs and maintenance is aviolation of accounting standard AASB 116 “Property, Plant & Equipment” as well as accepted goodpractice. As per the recognition Criteria of AASB 116:“The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: (a)it is probable that future economic benefits associated with the item will flow to the entity; and (b) thecost of the item can be measured reliably.”As per AASB 116, any transaction that meets the recognition criteria should be classified as property,plant and equipment and should be depreciated over its life. Since, purchase of plant and equipmentmeets the recognition criteria and further it is having economic benefits associated with it so it shouldbe classified as Property, Plant & Equipment. Manager might have does so because he wants to reduce the profit for the year by charging the entirecost of assets to P&L. By reducing profit, he can reduce the tax liability, keeping the cash flow intact. Thisis a common practice used to window dressed the profits of the company.

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