Incomplete Fixed Asset Question

Trancechick

Current 4th year accounting student here struggling with one point in a case study. Statements are for the year ending 31/12/2012. I have been given the following information in relation to a fixed asset:

During 2010 the government introduced legislation and as a result the entity were required to upgrade their refrigeration systems at an expected cost of €370,000. Due to cash flow difficulties work didn't commence until 2012, with only 50% of the work completed by 31/12/2012 at a cost for €185,000. This amount has not yet been paid but has been accounted for by debiting repairs and maintenance (within cost for sales) and crediting trade payables.

Due to the delay fines for €20,000 have been imposed, these fines have not yet been paid but have been accounted for by debiting repairs and maintenance (within cost for sales) and crediting trade payables. The entity have been informed that a further fine of €20,000 will be imposed if the work is not complete by the end of 2013.

In my opinion the debits and credits above are correct. With regard to the €185,000 outstanding to complete the upgrade and the potential fine of €20,000 for 2013 should I make a provision for either? Also, should the €185,000 already paid be listed within Fixed Assets or Capital Work in Progress?

Thanks in advance for any replies.

mikado123

Trancechick wrote: »

Current 4th year accounting student here struggling with one point in a case study. Statements are for the year ending 31/12/2012. I have been given the following information in relation to a fixed asset:

During 2010 the government introduced legislation and as a result the entity were required to upgrade their refrigeration systems at an expected cost of €370,000. Due to cash flow difficulties work didn't commence until 2012, with only 50% of the work completed by 31/12/2012 at a cost for €185,000. This amount has not yet been paid but has been accounted for by debiting repairs and maintenance (within cost for sales) and crediting trade payables.

Due to the delay fines for €20,000 have been imposed, these fines have not yet been paid but have been accounted for by debiting repairs and maintenance (within cost for sales) and crediting trade payables. The entity have been informed that a further fine of €20,000 will be imposed if the work is not complete by the end of 2013.

In my opinion the debits and credits above are correct. With regard to the €185,000 outstanding to complete the upgrade and the potential fine of €20,000 for 2013 should I make a provision for either? Also, should the €185,000 already paid be listed within Fixed Assets or Capital Work in Progress?

Thanks in advance for any replies.

Few things to consider:

1. Potential need for a provision in previous years accounts for the 370k. Legal obligation for improvement/investment

2. Should not have debited repairs-it is a fixed asset purchase. Should be offset against liability

3. Once payment is made, cr bank Dr trade payables

4. Fines should be separate as are not tax deductible so remove from repairs

5. Given it has taken 2 years to get 50% complete, would be prudent to provide for the non completion fine of 20k by end of next year

Hope the above helps. Love the optimism about the debits and credits in an accounting question being right!

HeinekenTicket

In 2012, capitalise the €185,000 spent to noncurrent assets and credit to other payables (not trade payables).
Re-classify the fines incurred of €20,000 and present them separately if material or agrregate them with other expenses below gross profit. Credit the fines to other payables (not trade).

There is no provision in 2012 for the remaining €185,000 unless they are effectively locked into a contract with a third party to complete the work and to spend in or around that amount. If they are doing the work themselves, no provision required until they actually incur the expense.

There is no provision in 2012 for the fines that are threatened. At the end of 2012, there is no obligation incurred in respect of the threatened fines. If there is no obligation, there is no provision.

I would not refer to prudence or rely on it as a basis for recognising anything in this case study. This question is a matter of distinguishing between actual obligations at the end of 2012 (which require recognition of provisions) and potential obligations (which do not).

Hope this helps.

mikado123

HeinekenTicket wrote: »

In 2012, capitalise the €185,000 spent to noncurrent assets and credit to other payables (not trade payables).
Re-classify the fines incurred of €20,000 and present them separately if material or agrregate them with other expenses below gross profit. Credit the fines to other payables (not trade).

There is no provision in 2012 for the remaining €185,000 unless they are effectively locked into a contract with a third party to complete the work and to spend in or around that amount. If they are doing the work themselves, no provision required until they actually incur the expense.

There is no provision in 2012 for the fines that are threatened. At the end of 2012, there is no obligation incurred in respect of the threatened fines. If there is no obligation, there is no provision.

I would not refer to prudence or rely on it as a basis for recognising anything in this case study. This question is a matter of distinguishing between actual obligations at the end of 2012 (which require recognition of provisions) and potential obligations (which do not).

Hope this helps.

Just in relation to the above-you would want to be sure that you can capitalise the asset before you do. Needs to be complete and available for use if i remeber correctly and it seems only half complete per the narrative. If capitalise you need to record depreciation also in tje accounts.

In relation to the last 20k fine not yet incurred i checked the ias so excuse the copy and paste job. To me it seems to meet the 3 criteria. Heineken views the facts differently-joys of accounting! Take a position

Recognition of a provision

An entity must recognise a provision if, and only if: [IAS 37.14]

a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event), payment is probable ('more likely than not'), and the amount can be estimated reliably.