Question

Roper Corporation purchase 100 storage boxes for the office the boxes cost $15 each and should last at least 10 years.

Argue against the capitalization of the boxes.

Argument should be grounded in the Conceptual Framework, emphasizing the Objectives of Financial Reporting and the qualitative characteristics of accounting information.

Answer 1

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AS FOR GIVEN DATA..

Roper Corporation purchase 100 storage boxes for the office the boxes cost $15 each and should last at least 10 years.

Argue against the capitalization of the boxes.

Argument should be grounded in the Conceptual Framework, emphasizing the Objectives of Financial Reporting and the qualitative characteristics of accounting information.

EXPLANATION ::-

As per IFRS 16 - Property Plant and Equipment:

Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7]

• it is probable that the future economic benefits associated with the asset will flow to the entity, and
• the cost of the asset can be measured reliably

In case of the boxes, the cost of each is clearly defined at $15 each. However, the future economic benefits, if any cannot be reliably measured. Since these are boxes for the office, it is presumed that it would be used in storing office files and other stationery found in the office. Whether any kind of economic benefit is generated from such storage is in itself a judgement. Hence measuring the value of any such economic benefit would be completely inaccurate, since the existence of the same in itself is in question.

Even if the boxes last 10 years, the value of the same is $15 X 100 = $1,500. Assuming that such an asset is probable to generate any kind of significant economic benefits to a large corporation would be a misleading judgement on the part of the accountant.

It would indicate tot he reader of the financial statement that an investment has been made in a something that is actively generating benefit.

Furthermore, such capitalisation would overstate the profit of the company on the year of purchase, since $1,500 of expense is capitalized wrongly.

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