- 5 Marks
Question
Damba Ltd spent GH¢400,000 on training courses for its employees, which has resulted in increased efficiency and cost savings. The Assistant Accountant has recognized the training costs as an intangible asset and charged six months’ amortization based on the average time within which the training courses were completed.
Required:
Comment on the Assistant Accountant’s treatment of the aforementioned transaction in Damba Ltd’s financial statements for the year ended March 31, 2022, and advise on how it should be handled under International Financial Reporting Standards.
Answer
The training courses may have the characteristics of an asset in that they have provided and will continue to provide future economic benefits to Damba Ltd in the form of enhanced efficiency and cost savings. The costs, however, cannot be recorded as an asset on the balance sheet and must be charged as an expense as soon as the cost is incurred.
The fundamental reason for this is the issue of ‘control’; the ‘skills’ offered by the courses belong to Damba Ltd’s employees, but those employees can leave the company and take their talents with them, or they can lose those skills due to an accident or injury.
In addition, under International Financial Reporting Standards (specifically IAS 38 Intangible Assets), the capitalisation of employee training costs is expressly prohibited.
- Tags: Amortization, Employee training, Expense Recognition, Intangible Assets
- Level: Level 2
- Topic: IAS 38: Intangible assets
- Series: DEC 2022
- Uploader: Olaoluwa