Question

Q3

Donna is a chemist and has been working for Cure-All Ltd on the design of a new drug to cure addictions to vaping. She decided to leave her job but the management of Cure-All Ltd were worried that she might work for their main competitor. Thus, management decided to offer Donna $1 million for not working in the industry for the next three years. Donna agreed to the employment restriction and Cure-All Ltd paid her $1 million.

This is the first time that Cure-All Ltd has made such a payment and the accountant is unsure how to account for it.

Required

Label your responses a) b) c) and d)

a) Identify the main accounting policy issue(s) for Cure-All Ltd regarding the payment to Donna. (2 marks)

b) Identify two principles or rules that are relevant to the accounting policy issue. (2 marks)

c) Describe two different policies to account for the payment to Donna. You may ignore the disclosure component. Do NOT justify your policy in this part. (4 marks)

Answer 1

a) Accounting policies are financial reporting rules a company must follow. Accounting policies
are method, procedure, system to present financial information in financial statement. It design
in such a way to disclose true and fair view of business. Some times accounting policies needs to
change if such changes are required for better financial presentation.
Payment to Donna of $ 1 million for not to work in the industries by Cure-All Ltd. is a different type of
transaction, which never happen earlier. Main accounting policy issue in this transaction is that, whether
it is to be treated as employees benefits and charged full amount in current year income statement as
revenue expenditure or treat the same as deferred expenses and recognised as an assets and amortize
the same with in three year when future economic benefits expected. So company have issue to apply
which accounting policy out of these two.
b) Accounting policies are based on accounting principal. Matching concept and Conservatism accounting principal
are relevant to the accounting policy issue.
As per Conservatism accounting principal, anticipate and disclose the loss at maximum and gain at minimum.
So full expenses of $ 1 million can be charged as revenue expenditure to income statement against the current
year revenue.
As per the matching concept, company to use accrual concept of accounting and expenses be matched with
revenue (economic benefits). So as per this principal, expenses of $ 1 million should be amortized over three
economic benefits period.
Accounting Policy 1:	Any deferred expenditure shall be treated long term assets and amortization of the same shall be done
	in the period of future economic benefits arised. So payment of $ 1 million to an ex-employee for next
	three year shall be capitalised as non current assets and $ 3.33 Lacs of amortization shall be recognised
	as an expenses in next three subsequent year.
Accounting Policy 2:	Any expenses shall be recognised based on conservative principal and maximum loss shall be recognised
	in the initial year of expenses. So payment of 1 million to be recognised as an expenses for the current
	year as revenue expenses.