can you accrue for the difference remaining (70%) after making an inital downpayment for 30% on a capital asset?

Question

Company's year end - December 31st,

Downpayment on capital asset made on December 20th. (30,000)

A PO was generated for the full amount of the asset $100,000 in December and states 30% due up front, 60% due when the asset is loaded on ship to sail to country (expected in Feb of the next year) and the remaining 10% on delivery.

Should the balance of the amount due on the assets (70,000) be accrued for as at December 31st. (DR Assets and CR accruals)

Would appreciate your feedback soonest with IASes references.

Answer 1

Hi,

As the asset is purchased according to executory contract, it does not fall in criteria of contingent asset we shall follow IAS 16 - property, plant and Equipment for the purpose of accounting.

Asset shall be recognized at total cost ($100000) in the financial statements. And remaining $ 70000 shall be termed as Liability.

Answer 2

In order for an asset to be recognized in the financial statements, it must the following definition laid down in the IASB Framework:

Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity (IASB Framework).

In your case, the asset does not meet the recognition criteria under IASB Framework. Only once you get the control of the asset, you can recognize it in your books. 

Entries for the transactions mentioned above should be:

Downpayment ($ 30,000)

Dr.     Advances to suppliers

Cr.     Bank

Progress Payment ($ 60,000)

Dr.    Advance to Suppliers

Cr.    Bank

Final Payment on delivery ($ 10,000) - Time to recognize asset:

Dr.    Asset        100,000

Cr.   Advances to suppliers       90,000

Cr.   Bank                               10,000