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AC120 lecture 38

AC120 lecture 38. Completion of suspense accounts Thomas chapter 18 Try 18.4 and 18.8 FRS 15 tangible fixed assets. Suspense account example.

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AC120 lecture 38

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  1. AC120 lecture 38 • Completion of suspense accounts • Thomas chapter 18 • Try 18.4 and 18.8 • FRS 15 tangible fixed assets

  2. Suspense account example • A trial balance reveals that the sum of the debit balances exceeds the sum of the credit balances by €2,509. A suspense account is opened. Subsequently the following errors are discovered: • Debit side of cash book overcast by €1,000 • Goods bought by cheque for €200 credited to the cash book but not entered to the purchases account • Rent paid €50 credited to the cash book and also credited in error to the rent account • Car repairs of €23 debited to the motor expenses account as €32 in error • Balance on sales account is €2000 but is shown as €200 in the trial balance

  3. Tangible Fixed Assets • Source: FRS 15 • Issued February 1999 • Effective 23 March 2000

  4. FRS 15 Tangible Fixed Assets Objectives • Consistent principles are applied to the initial measurement of TFA • Where an entity chooses to re-value tangible fixed assets the valuation is performed on a consistent basis and kept up-to-date • Depreciation of TFA is calculated in a consistent manner • Sufficient info. is disclosed in the FS to enable users to understand the impact of the entity’s accounting policies regarding initial measurement, valuation and depreciation

  5. FRS 15 Tangible Fixed Assets • Initial Measurement • Valuation • Depreciation • Disclosure

  6. FRS 15 Tangible Fixed Assets Initial Measurement • A TFA should be initially measured at cost • Only those costs directly attributable to bringing the asset into working condition for its intended use should be included. • Cost = Net purchase price + directly attributable costs • Net purchase price = purchase price after any trade discounts and rebates

  7. Tangible Fixed Assets – FRS 15 Directly Attributable Costs • Labour costs of own employees arising directly from construction/acquisition of the TFA • Incremental costs to the entity that would otherwise have been avoided if the TFA had not been constructed/acquired

  8. FRS 15 Tangible Fixed Assets Cease capitalisation of directly attributable costs when: • Substantially all the activities that are necessary to get the TFA ready for use are complete. (even if the TFA has not yet been brought into use)

  9. FRS 15 Tangible Fixed Assets Example: • A manufacturing company commissions the building of a new factory. The associated costs are as follows: Site selection €30,000 Site purchase €1,000,000 Architects fees €50,000 Engineers fees €150,000 Legal fees €50,000 Construction costs €1,500,000 Testing & checking of machinery €250,000 • Included in testing and checking of machinery costs was €50,000 in connection with a 6 monthly diagnostic check of machinery

  10. FRS 15 Tangible Fixed Assets Solution: Site Cost €1,000,000 Construction Cost €1,500,000 Architect’s Fees €50,000 Legal Fees €50,000 Engineer’s fees €150,000 Testing costs (note 1) €200,000 Total Cost €2,950,000

  11. FRS 15 Tangible Fixed Assets Amount Initially Recognised: • If the amount recognised when a TFA is acquired or constructed exceeds its recoverable amount, it should be written down to its recoverable amount.

  12. FRS 15 Tangible Fixed Assets Subsequent Expenditure on an Asset: • Expenditure to ensure that the TFA maintains its previously assessed standard of performance: • Recognise in the P&L as it is incurred • i.e. Repairs and Maintenance

  13. FRS 15 Tangible Fixed Assets • Capitalise subsequent expenditure in 3 cases: 1. Where the subsequent expenditure provides an enhancement of the economic benefits of the TFA in excess of the previously assessed standard of performance 2. Where a component of the TFA that has been treated separately for depreciation purposes and depreciated over its individual UEL, is replaced or restored  3. Where the subsequent expenditure relates to a major inspection or overhaul of a TFA that restores the economic benefits that have been consumed and reflected in depreciation

  14. FRS 15 Tangible Fixed Assets Examples of Enhancement of Economic Benefits: • Modification of an item of plant to extend its UEL or increase its capacity • Upgrading machine parts to achieve a substantial improvement in the quality of output.

  15. FRS 15 Tangible Fixed Assets • Some assets require substantial expenditure every few years for major refits or refurbishment • Entity should account separately for major components that have substantially different UELs from the rest of the asset

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