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.

In order 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 accountant 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:

1.1 Discuss whether you agree with the accountant, making reference to the framework. Provide an alternate treatment if you disagree.   (20)

1.2 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.   (5)

Answer 1

1.1)As per the accounting framework of generally accepted accounting:

Promotion expenses made by any business will have to be trated as a revenue item.

However inorder to capitalize such expenditure made as a intangible asset it will have to meet the following conditions

1) it is probable that the future economic benefits will flow from the expenditure made to the business,and

2) there exists a reliable estimate to measure the cost incurred on such asset.

The given case fails to provide the assurance of probable flow of economic benefits to tge company.

The aforementioned expenditure will have to be treated as revenue expenditure irrespective of amount spent by entity on the said promotion.

1.2) reliabilty refers to the financial statements trustworthiness which is important for every company investor and every stake holder to take important decisions concerning the company.

Ensuring that finacial statements is more of their compliance with applicable framework of preparation and presentation of disclosures as required that make even a outsider of the company could understand the operations and their fruits received by the company.

It also involves in the excercise of manamgements ability to judge and manage the estimated outcomes of the business successfully whis is a reflection of informed deciscion making and excercise of due diligent thier duties.

Finally the certificate if the company finacial liabilty is ensured by the company by adopting internal audit and statutory audit the former is for the information to management at grrater level and latter is an indepemdent expret expressing opinion on the given financials to a reasonable level.