Question

1. Two issues that the FASB has dealt with in the past include the following:

a. Capitalization vs. Expensing of certain costs

B. off balance sheet financing

c. Discuss the potential ramifications of the alternatives auditors should be aware of depending on how management chooses to account for transactions in these areas.   

Answer 1

Auditors while auditing the books of account always deal with above two issues i.e. Capitalization vs Expensing and off balance sheet financing. The auditor should always be aware of these two issues and account the same as per guidance suggested by accounting standards. Accounting standard IAS 16 clearly deals the situation which cost can be capitalized and which can be expensed off. Similarly IFRS 9 also states the items will be recognized as financial liability in the books of accounts. By taking guidance from these two situation auditor can easily tackle the above situations.

Lets understand the type of transaction for each case-:

a) The issue whether to capitalize or not mainly arises in the case significant repairs and maintenance. IAS 16 states that if significant repairs and maintenance improves the capacity/improvement of asset, then the same needs to be capitalized otherwise expensed off in the same year.

b) Off balance sheet mainly involves securitization transaction in the case of finance companies. IFRS 9 specifies the de-recognition criteria for the same.