Question

Please help with this question.

Quick Fix Ltd is a manufacturing company engaged in the production of adhesives. The company has not performed well over the past three financial years. So as to improve on the poor past profits, the board approved a R1 000 000 advertising promotion during the year ended 31 December 2018 in order to generate increased sales in the future. The advertising promotion took place ( and was paid for) during December 2018.

The account insists on recognizing the R1 000 000 payment as an asset at 31 December 2018. His reasoning is that future sales will increase as the number of customers grows due to the advertising campaign.

Required:

1. Discuss whether you agree with the accountant, making reference to framework. Provide alternate treatment if you disagree.

2. One of the most important characteristics that a set of financial statements should have is reliability. Explain in terms of the framework, how to ensure that a set of financial statements is reliable?

Answer 1

Answer 1.

Facts:

Quick Fix Ltd incurred advertisement expenditure of Rs.1,000,000/- on 31st December 2018, i.e. last date of the financial year.

The Accountant wants to treat the expenditure as an asset on the grounds that the apparent revenue increment will occur in the successive financial year(s).

Discussion:

Prepaid expenditure is an expenditure which is incurred in the current financial year and whose benefits are to accrue in subsequent financial years.

In the given case, the advertisement expenditure is incurred on the last date of the financial year. The promotion was also completed on 31st December 2018 itself. Hence, the benefits against the cash expenditure were received in the same year.

Now, when will the revenue due to such expenditure will arise is not certain. It may also happen that there is no additional revenue due to the said promotion. Hence, the benefits against the expenditure are not directly measurable. Hence, booking the amount as prepaid expenditure will be incorrect accounting treatment, as the period over which the revenue will escalate is also not certain.

Conclusion:

Thus, it can be concluded that the advertisement expenditure of Rs.1000000/- will be treated as an expense in the year ended 31st December 2018, and not as an asset. We disagree with the stand of the accountant

Answer 2:

As per the IFRS framework, for financial statements to be reliable