Reference no: EM132725211
One of the firm's clients has recently acquired an item of Property, Plant and Equipment (PPE) and is in the process of testing the item to check whether it is functioning properly. This item is not yet available for use. The following is the equipment and testing related information for the period 2020-21:
Acquisition cost of the item of Property, Plant and Equipment $200 million
Costs associated with the testing process to date $7 million
Cost of samples produced during the testing process $6 million
Proceeds from selling sample items produced during the testing phase $9 million Average annual profit $30 million
- Due to the current COVID situation, the client is experiencing a significant decline in the demand and selling price of its commodities. The client is highly concerned that the proposed amendments to IAS 16 will distort the company's reported profit and net assets.
Therefore, draft a short letter to the client explaining the impact of proposed IAS 16 amendments (use your imagination for the client's industry, name and asset).
The client letter should:
Problem (a) Provide a brief overview of the current requirements and proposed amendments without technical using accounting terminology. Remember your client is not an accountant.
Problem (b) Explain and illustrate possible impact of the proposed amendments to IAS 16 using the above facts. Please assume that the effective date for the proposed amendments is 1 July 2020. Hint: Consider how the proposed amendments would impact key financial performance metrics and disclosure requirements in the financial statements of the client.