Group 4 (Conceptual Framework)

Dimos Stars FC has recently implemented a maintenance project to prepare its grounds for
the new season. The project took four months to complete and costs the club $200 000, which
was paid on completion. The managing director has suggested that this expenditure be
recognised as an asset, so that the expense can be deferred until income is earned from ticket
sales in the upcoming season.

Required

Discuss, with reference to the Conceptual Framework, whether or not the managing director’s
suggestion is appropriate for these costs. [Total: 20
Mark]

According to the Conceptual Framework for Financial Reporting, expenses should generally
be recognized in the financial statements when they are incurred, and not when the associated
income is earned. This principle is known as the matching principle, which aims to match
expenses with the revenues they help generate in the same reporting period.

In the case of Sundown Chiefs FC's maintenance project, the expenditure of $200,000 was
incurred over a period of four months to prepare the grounds for the new season. The
managing director's suggestion to recognize this expenditure as an asset and defer the
expense until the income is earned from ticket sales in the upcoming season goes against the
matching principle.

Recognizing the expenditure as an asset would mean capitalizing it on the balance sheet as a
long-term asset and amortizing or depreciating it over its useful life. However, maintenance
expenses are typically considered as costs necessary to maintain the existing level of
operations and are expensed when incurred rather than capitalized.

It's important to note that the Conceptual Framework allows for the recognition of certain
costs as assets when they meet specific criteria. These criteria include the probability of
future economic benefits flowing to the entity, the ability to measure the cost reliably, and the
fulfillment of the definition of an asset. However, routine maintenance expenses that do not
result in significant enhancements or improvements to the asset are generally considered to
be expenses rather than assets.

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In the case of Sundown Chiefs FC, the maintenance project is not expected to provide future
economic benefits beyond maintaining the existing condition of the grounds. Therefore, it
would be more appropriate to expense the $200 000 incurred for the project in the period it
was undertaken, rather than capitalizing it as an asset.

By recognizing the expenditure as an expense in the current period, the financial statements
would provide a more accurate representation of the costs incurred in generating the revenues
for that period. This would adhere to the matching principle and provide users of the financial
statements with relevant and reliable information about the club's financial performance.

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