Question

West Ltd has always marketed itself as operating in an environmentally responsible manner, and is an advocate of sustainable fishing. The public regards it as a dolphin-friendly company as a result of its previous campaigns to ensure dolphins are not affected by tuna fishing. The marketing manager of West Ltd has noted the efforts of the ship, the Steve Irwin, to disrupt and hopefully stop the efforts of whalers in the southern oceans and the publicity that this has received. He has recommended to the board of directors that West Ltd strengthen its environmentally responsible image by guaranteeing to repair any damage caused to the Steve Irwin as a result of attempts to disrupt the whalers. He believes that this action will increase West Ltd.'s environmental reputation, adding to the company's goodwill. He has told the board that such a guarantee will have no effect on West Ltd.'s reported profitability. He has explained that, if any damage to the Steve Irwin occurs, West Ltd can capitalise the resulting repair costs to the carrying amounts of its brands, as such costs will have been incurred basically for marketing purposes. Accordingly, as the company's net asset position will increase, and there will be no effect on the statement of profit or loss and other comprehensive income, this will be a win-win situation for everyone.
Required:
The chairman of the board knows that the marketing manager is very effective at selling ideas but knows very little about accounting. The chairman has, therefore, asked me to provide him with a summary advising the board on how the proposal should be accounted for under the Financial Reporting Standards and how such a proposal would affect Dixon Ltd.’s financial statements

Answer 1

Answer:

According to IFRS any cost that is associated with bringing the asset into use is capitalized. If the management intend is to use the island and then restore it to the current state and repair any damages costs it can be capitalized. This is only possible if the expense can be reliably measured before the asset use and it is only for the purpose of asset usage. If the company intends to consider it as a social responsibility activity then it must expense it out instead of capitalizing it. In IAS 16 of IFRS it only gives options to capitalize the dismantling cost when the cost is associated with the use of asset. For marketing and social responsibility purposes if the repair is undertaken then the cost cannot be capitalized.

Explanation:

West Ltd has planned to increase its business by fishing of tuna near the Steve Irwin which is an island in the Australia. The extended fishing could cause damage to the island as it will disrupt whalers but the company plans to repair any damages caused by its activities. The cost cannot be capitalized as it is for marketing purposes.