Question

QUESTION 16 X Ltd is dependent upon its software to process its purchases and sale transaction and has a year end of 31 January. On 15 January 20.5, X Ltd approached a computer consultant to establish whether or not its software is compliant with its own new open source operating system. On 31 January 20.5, the consultant informed X Ltd that the software is not compliant and that X Ltd would need to spend about N$3 million to make its software compliant. The financial director of X Ltd has decided to provide for the amount of N$3 million in its accounting records for the financial year ended 31 January 20.6. X Ltd has not yet appointed a contractor to do the modifications. Required Discuss the financial director’s decision to provide for the amount of N$3 million in the financial statements of X Ltd for the year ended 31 January 20.6. You must assume that the amount is material. Justify your answer by only referring to the requirements of the Framework.

Answer 1

As per GAAP and following the fundamental concepts of accounting the given below concepts should have been taken into consideration while recording a transaction in the books of accounts :

• Accounting period concept
• Accrual basis of accounting
• Materiality concept

Since the amount to be spent to make the software compliant with the open source operating system is to be utilised for the year ending 31. 01.2015 thus the expense incurred should not be deferred and should be recognised in the same year. Moreover the expense being material in nature should be recorded in the same year and should not be deferred following the fundamental concepts of accounting. The expense incurred should be recorded in the same accounting period irrespective of the fact contractor have been appointed or not as expense pertains to the same accounting period. 31. 01.2015.

Thus the financial director of X Ltd. 's decision of deferral of material expenditure is not in accordance with the fundamental principles of accounting and should be recognised in the same accounting year

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