Reference no: EM132653244

Monte Carlo Club is an international sports and leisure club that has recently entered the South African market. The club pays large incentives to sales representatives to sign up customers on a two year contract. The member then has to pay the club a monthly fee for the two year period.

The company believes that it should capitalize the incentives paid and amortise them over a 10 year period. These amortizations are based on their experience in Europe where customers who join on the two year contract generally remain legal members of the club after the first contract has expired. The expectation that members generally renew their contracts after the expiry of the first contract is based on research performed over the last five years.

Required:

Question 1: Discuss the recognition of the incentive payment with reference to the conceptual framework (IAS 1).

Question 2: When answering a discussion type question involving the recognition of the elements, it is generally advisable to structure your answer as follows:

1. quote the definition of the relevant element/s (asset, liability, income or expense) and discuss each aspect of it with reference to the transaction in order to ascertain whether or not the definition/s is met;
2. quote the relevant recognition criteria and then discuss whether the element meets each of the recognition criteria; and
3. conclude by stating which element the item is classified as (based on the definition)  and then whether or not this element should be recognised (based on the recognition  criteria).