Question 4 (a) A student in the financial accounting module had given the definition of a non-current asset as a physical asset of substantial cost, owned by the company, which will last longer tha

Question 4

(a) A student in the financial accounting module had given 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:

Comment on the weakness in this definition of non-current assets when compared to the International accounting standards board’s (ISAB) view of assets.

(b)In drafting the financial statements of hobbie pte ltd for the year ending 31 December 2010, an accounts assistant has treated the items in the following manner;

(i) During the year, Hobbie spent $100,000 on staff training which led to an improvement in the company’s efficiency and resulted in cost savings. It is stated in the course brochure that the benefits from the training should last for a minimum of three years. The assistant has therefore treated the cost of the training as an intangible asset and amortised the costs over the years.

(ii) On 7 January 2010, the R & d department started a research work with a view to the eventual development of a special gel. By the end of the year, the expenditure incurred on this project was $230,000.Hobbie had in the past been very profitable in bringing new product into the market place. Therefore, the assistant had treated the $230,000 research as an asset in the statement t of financial position.

(iii) On 3 June 2010, the government approved a grant of $100,000 for the R&D effort for its product mentioned in part(ii).The cash will be reimbursed once the product goes into production. The assistant had taken in the $100,000 into the income statement for the year ending 31 December 2010.

(iv) During the year Hobbie was also commissioned by a customer to research and, if feasible, PRODUCE A SOUND ABSORPTION MATERIAL THAT WILL BE APPROVED BY THE MARINE FIRE AUTHORITY.As at 12 November 2010,Hobbie had spent $112,000 on this project but was still uncertain as to whether the project would be successful. The assistant had written off the $112,000 as an expense in the income statement.

Required:

For each of the above items(i) to (iv) comment on the assistant’s treatment of them in the financial statements for the year ended 31 December 2010 and advise him on how they should be treated under international financial reporting standards.

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