Question Tag: Classification

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  • 20 Marks

FA – May 2016 – L1 – SB – Q6 – Elements of Financial Statements

Classify various expenditures as revenue or capital and their impact on financial statements and non-current asset register.

Given below are items of “Revenue” and “Capital” expenditure:

(i) A number of new cars that had recently been cleared by a motor car dealing company.

(ii) Two new motor boats acquired by a ferry service agency.

(iii) Vacant houses owned by an estate developing company in respect of which negotiations are ongoing for assistance for their sale to prospective landlords.

(iv) New buildings acquired for the purpose of holding the items of plant and machinery belonging to a detergent manufacturing company.

(v) Cost of acquiring a leasehold property for office use.

(vi) Granites purchased by an engineering contractor for use at a construction site.

(vii) Cost of rehabilitating a dilapidated housing unit owned by an estate developer.

(viii) Repairs to plant and machinery in a manufacturing company.

Required:

a. For each of the above, state whether it is a “Revenue” or “Capital” expenditure. (4 Marks)

b. State how each will be recognised in the statement of profit or loss and the statement of financial position as the case may be. (12 Marks)

c. State how the non-current assets register will be affected by any of the transactions. (4 Marks)

(a) Classification of Expenditure:

Item Type of Expenditure
(i) A number of new cars that had recently been cleared by a motor car dealing company. Revenue
(ii) Two new motor boats acquired by a ferry service agency. Capital
(iii) Vacant houses owned by an estate developing company in respect of which negotiations are ongoing for assistance for their sale to prospective landlords. Revenue
(iv) New buildings acquired for the purpose of holding the items of plant and machinery belonging to a detergent manufacturing company. Capital
(v) Cost of acquiring a leasehold property for office use. Capital
(vi) Granites purchased by an engineering contractor for use at a construction site. Revenue
(vii) Cost of rehabilitating a dilapidated housing unit owned by an estate developer. Capital
(viii) Repairs to plant and machinery in a manufacturing company. Revenue

Explanation:

  1. Revenue Expenditure: Costs related to the daily operations, which do not provide long-term benefit, such as the purchase of inventory (item i), maintenance and repairs (item viii).
  2. Capital Expenditure: Costs incurred to acquire or improve a long-term asset, which will provide benefits over time, such as purchasing new boats (item ii) and buildings (item iv).

(b) Recognition in Financial Statements:

Item Statement of Profit or Loss Statement of Financial Position
(i) A number of new cars that had recently been cleared by a motor car dealing company. Cost of Goods Sold / Inventories Current Asset – Inventories
(ii) Two new motor boats acquired by a ferry service agency. Depreciation Expense Non-Current Asset – Property, Plant, Equipment (PPE)
(iii) Vacant houses owned by an estate developing company in respect of which negotiations are ongoing for assistance for their sale to prospective landlords. Sales Revenue (upon sale) Current Asset – Inventories
(iv) New buildings acquired for the purpose of holding the items of plant and machinery belonging to a detergent manufacturing company. Depreciation Expense Non-Current Asset – Property, Plant, Equipment (PPE)
(v) Cost of acquiring a leasehold property for office use. Amortization Expense Non-Current Asset – Leasehold Property (Intangible)
(vi) Granites purchased by an engineering contractor for use at a construction site. Cost of Goods Sold / Work-in-Progress Current Asset – Inventories / WIP
(vii) Cost of rehabilitating a dilapidated housing unit owned by an estate developer. Depreciation Expense (if capitalized improvements) Non-Current Asset – Property, Plant, Equipment (PPE)
(viii) Repairs to plant and machinery in a manufacturing company. Repairs and Maintenance Expense Not Recognized

(c) Effect on Non-Current Assets Register:

  1. Item ii: Increase in the asset register with the addition of two new motor boats.
  2. Item iv: Increase in the asset register with the addition of new buildings.
  3. Item v: Increase in the asset register under leasehold property.
  4. Item vii: Increase in the asset register as rehabilitated housing units are capitalized.

Other items classified as revenue expenditure do not affect the non-current assets register.

  • 4 Marks

CR – Nov 2019 – L3 – Q2b – IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations

Discuss the criteria for classifying an operation as discontinued and the accounting treatment involved.

b) IFRS 5: Non-current Assets Held for Sale and Discontinued Operations sets out the principles governing the measurement and presentation of non-current assets that are expected to be realised through sale rather than through continuing use. The standard also deals with reporting the results of operations that qualify as discontinued operations.

Required:
Identify TWO (2) conditions which must be present in order to present the results of an operation as “discontinued” and the accounting treatment that applies when such a classification is deemed appropriate.

(4 marks)

  • Conditions for Presenting Results as Discontinued Operations (IFRS 5):
    • Condition 1: Separate Major Line of Business or Geographical Area
      To classify an operation as discontinued, it must represent a separate major line of business or geographical area of operations. This could involve a business unit that is distinct from the entity’s other operations.
    • Condition 2: Plan to Sell the Operation
      The disposal of the operation must be part of a single co-ordinated plan to dispose of a separate major line of business or geographical area. The sale must be highly probable, and management should be committed to a sale that is expected to be completed within one year.
  • Accounting Treatment for Discontinued Operations:
    • Presentation in the Financial Statements:
      Results from discontinued operations must be presented separately in the statement of profit or loss. This includes the post-tax profit or loss from discontinued operations and any gain or loss on the disposal or remeasurement of assets classified as held for sale.
    • Measurement:
      Non-current assets classified as “held for sale” should be measured at the lower of carrying amount and fair value less costs to sell. Once classified as “held for sale,” these assets should no longer be depreciated or amortized.

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