Reference no: EM132961597
An assistant of yours has been criticised over a piece of assessed work that he produced for his study course for giving the definition of a non-current asset as 'a physical asset of substantial cost, owned by the company, which will last longer than one year'.
Required:
Problem (i) Provide an explanation to your assistant of the weaknesses in his definition of non-current assets when compared to the International Accounting Standards Board's (IASB) view of assets. The same assistant has encountered the following matters during the preparation of the draft financial statements of Henry for the year ending 30 September 2009. He has given an explanation of his treatment of them.
Problem (ii) Henry spent $200,000 sending its staff on training courses during the year. This has already led to an improvement in the company's efficiency and resulted in cost savings. The organiser of the course has stated that the benefits from the training should last for a minimum of four years. The assistant has therefore treated the cost of the training as an intangible asset and charged six months' amortisation based on the average date during the year on which the training courses were completed.
Problem (iii) During the year the company started research work with a view to the eventual development of a new processor chip. By 30 September 2009 it had spent $1·6 million on this project. Henry has a past history of being particularly successful in bringing similar projects to a profitable conclusion. As a consequence the assistant has treated the expenditure to date on this project as an asset in the statement of financial position. Henry was also commissioned by a customer to research and, if feasible, produce a computer system to install in motor vehicles that can automatically stop the vehicle if it is about to be involved in a collision. At 30 September 2009, Henry had spent $2·4 million on this project, but at this date it was uncertain as to whether the project would be successful. As a consequence the assistant has treated the $2·4 million as an expense in the income statement.
Required:
For each of the above items (ii) and (iii) comment on the assistant's treatment of them in the financial statements for the year ended 30 September 2009 and advise him how they should be treated under International Financial Reporting Standards. Note: the mark allocation is shown against each of the two items above