Accounting Standard AASB116 | Assignment

Added on -2020-02-19

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Solution-1(a)The Golf Gear Company often debits the cost of repairs or maintenance of equipment to Plantand equipment. This is a violation of accounting standard AASB 116 “Property, Plant & Equipment” as itdoes not meet the recognition criteria of standard. As per 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 futureeconomic benefits associated with the item will flow to the entity; and (b) the cost of the item can bemeasured reliably.”Repairs and maintenance are of two types, the ordinary repairs and maintenance does not give rise toany future economic benefit nor they increases the life or productivity of the assets that’s why it shouldnot be added to the cost of assets rather it should be charged off as an expense to the Statement ofProfit 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. (b)The recognition Criteria of AASB 116 states that “The cost of an item of property, plant andequipment shall be recognized as an asset if, and only if: (a) it is probable that future economic benefitsassociated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.”As per AASB 116, any transaction that meets the recognition criteria should be classified as plant andequipment and should be depreciated over its life. Since, purchase of plant and equipment meets therecognition criteria and further it is having economic benefits associated with it so it should be classifiedas Plant & Equipment. So, the act of Castle industries manager of debiting the plant and equipment costto repair and maintenance is non tenable. Manager does so because he might want to reduce the tax liability of the company by reducing theprofit for the year by charging the entire cost of assets to P&L. (c)Intangible assets are those assets which have no physical substance but have benefits to thebusiness of the company. As per AASB 138 “Intangible Assets” any intangible that has expected futureeconomic benefits to the entity should be recognized as an asset and these types of intangibles shouldbe recorded at cost. And if the asset is created or acquired at no cost or for a nominal cost, the assetshould be recorded at fair value on the transaction date (i.e. acquisition date or its creation date).It is agreeable fact that many intangible assets have no value except to the business that owns them, butto create such assets, the business might have incurred some or other expenses. Only after incurring allthese expenses, the business will be able to use that website. So, all these expenses associated with theintangibles should be recognized as intangible assets. So, the view that intangible assets should be recognized at $1 or $0 is not a valid view.

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