Formulate accounting policies on the following items relating to the financial statement of the public sector entities. (6 marks)
i) Land and Building
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Accounting policy relating to Land and Building covers cost measurement and recognitions and depreciation policies.
Cost Measurement and Recognition
- Initial recognition of land and building is at historical cost. Subsequent recognition is on carrying amount or revaluation.
- All acquisitions of land and building as well as improvements will be capitalized when the criteria of recognition in accordance with the IPSAS are met.
- Land and building should be derecognized when potential benefits cannot be expected to from to the entity.
Depreciation/impairment
- The depreciable/amortization amount of building be allocated over its useful life in accordance with the depreciation method.
- It is assumed that the residual value for all assets will be zero.
- The calculation of depreciation/amortization will stop where an asset is disposed of, held for sale or is fully depreciated.
- Impairment of building should be written off.
- The calculations of depreciation will commence in the year the asset is put to use for its intended purpose.
- Impairment loss shall be recognized immediately in the Covered Entity’s income statement, unless the asset is carried at a revalued amount.
- Where the impairment loss relates to a revalued asset, the impairment is firstly offset against its revaluation reserve balance. Any remaining impairment loss shall be recognized immediately in Covered Entity’s Income Statement.
- After recognizing the impairment loss, the depreciation charge shall be adjusted by taking into account the revised carrying amount, residual value and remaining useful life.
ii) Inventories
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Accounting policy for inventory is as follows.
Measurement
- Inventory for sale shall be recognized at lower of cost and net realisable value.
- Inventory not for sale shall be recognized at lower of cost and current replacement cost.
- Inventory acquired through non-exchange transaction should be measured at fair value at the date of acquisition.
Recognition
- Inventory sold, exchanged or distributed shall be recognized as expense at carrying amount in the period in which the revenue relates, exchange or distribution is made.
- Write offs in inventory should be recognized as expense in the period it relates.