No deferral of a cost that is not an asset

Learning objectives

• Determine that a cost that does not meet the definition of an asset at the interim date is not deferred in the statement of financial position to smooth profit or loss.L2

Normative references

• IAS 34 §30Illustrations of the same-criteria principle: (a) inventory write-downs, restructurings and impairments follow the same principles as at year-end, and a change in estimate in a later interim period results in an additional charge or a reversal; (b) a cost that does not meet the definition of an asset at the end of the interim period is not deferred in the statement of financial position, either to await future information or to smooth earnings; (c) the income tax expense of each interim period is based on the best estimate of the weighted average annual income tax rate expected for the full financial year, and amounts already recognised are adjusted if that estimate changes.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

5 questions

• At 30 June, Fenwick SA incurred EUR 90,000 of sales prospecting costs to launch a range in the second half-year. Case assumption: these costs do not meet the definition of an asset, either at the annual closing or at 30 June. Management proposes to carry them in the statement of financial position at 30 June and charge them to the second half-year so as to "smooth" profit. What must Fenwick SA do?L2
• Caldrin SA sells ski equipment; according to the case, more than 60% of its annual revenue is earned in the fourth and first quarters. In the second quarter, the finance director proposes to recognise as revenue a quarter of the estimated annual revenue, that is EUR 2,500,000 out of EUR 10,000,000, "so that the quarter looks like an average year". Sales actually made in the quarter are EUR 900,000 (case data). What must Caldrin SA do?L2
• Arvon SA runs a seaside hotel. Case data: estimated annual revenue of EUR 9,600,000, of which EUR 6,100,000 in the third quarter; case assumption: revenue is earned during guests' stays. An analyst asks for each quarter to recognise EUR 2,400,000 "for comparability between quarters". Write a short note on the treatment of seasonal revenue in the interim reports of the year, distinguishing rule, case facts and professional judgement.L2
• Which statements about the treatment, in an interim report, of a cost incurred unevenly during the year are correct? More than one answer is possible.L2
• Merkan SA carries out in September the annual scheduled maintenance of its production lines, for EUR 240,000 (case data). Case assumptions: the maintenance is performed and invoiced in the third quarter; before it is performed, Merkan SA has no obligation to carry it out, and the cost does not meet the definition of an asset at the annual closing. Management proposes to recognise EUR 60,000 per quarter "to smooth the quarters". What must Merkan SA do?L2