Question

"Self Constructed Assets and Nonreciprocal Transfers" Please respond to the following:

Imagine you are the senior accountant in the Fixed Assets department at your organization, and management is undecided as to whether it should construct its fixed assets or purchase such assets from an outside source. You are responsible for preparing a report to management, highlighting the advantages and disadvantages of self-constructed assets. Suggest to management two (2) advantages of purchasing the assets from an outside organization, as opposed to constructing the assets internally. Justify your response.

Imagine that management is considering a nonreciprocal transfer of an old asset. Determine the key arguments for and against the accounting treatment of a nonreciprocal transfer. Select a position for or against the accounting treatment, and explain the method that reflects the best accounting practice

Answer 1

Answer

Purchasing of fixed assets would have the following advantages -

1. Lower cost - Fixed asset construction would require expertise and purchase of non regular items. The cost of hiring expertise and non regular items would be high for the company as there would not be economies of scale. Purchasing the same from an outside regular manufacturer would allow obtaining the same at lower cost.

2. Time Saving- Purchase of asset would save significant amount of time as the same may be readily available as against manufacturing the same.

Non reciprocal transfer of old asset:

It is not clear whether the asset is donated by company or is received by a company . In any of the cases though there will not be any monetary consideration for the asset transfer , it will not be correct if the value of the asset donated or received is not recognized or the resultant profit or loss not recognized.

The correct method will be to ascertain the fair value of the asset getting transaferred by independent market apprisal or by calculating the NPV of future cash flows.

For Inbound transfer ;

Fixed asset a/c will be debited by the fair value of asset

Contribution Revenue will be credited for the same amount.

For outbound transfer;

Asset Book Value will be credited to make it zero

Accumulated depreciation will be debited to make it zero

Charitable donation as expense will be recognized for the fair value of the asset

Gain or loss on asset donation will be recorded for the difference between Fair value and carrying value of the asset.