Amortized or Direct Expense

[ash_arani]

Hi everyone. We deal with a group of companies run by the same owners.

Every employee has a set of costs for their labor card, id card, health card, residency visa, etc..., that have to be renewed every two years.

At renewal, should we charge the renewal fees as expenses to a single month or should we treat these fees as prepaid expenses and amortize them over 24 months?

Please note that employees do move between the companies. So for example, employee A can work for 6 months in company ABC and 18 months in sister conpany CDE. (The companies books are all separate). But the rotation is not pre-planned so there is no way of knowing how long an employee will be in company ABC as opposed to company CDE

The same issue applies to trade license fee. Should we expense it in full in a a single month or amortize it over the year it is active?

I was given multiple opinions and I was wondering what is the right way as instructed by the IFRS.

I appreciate the help.

 

[Fidget]

This is one of these situations where it's more about what the affect of how you've treated something in your accounts actually has on your accounts rather than the treatment itself, and that's quite possibly why you've had multiple opinions on it.

Under IFRS, you're looking to IAS 1 & 8 - Presentation of Financial Statements/Accounting Policies, Changes in Accounting Estimates and Errors, for guidance. Under both of these standards you basically have to present your financial statements in such a way that they would not be misleading to a user of them at any particular point in time, and be consistent in accounting policies.

So, if you decide to write these expenses off as incurred, then you could do that but you'd need a note to your accounts detailing that it is the policy to do that, and why it is policy to do that. One of the major thrusts of IFRS is that it's all about the users of the accounts rather than what's the easiest way to prepare them or best for the company.

 

[ash_arani]

Thanks Fidget for the information.

Although it would be easier to write those expenses off in a specific month, it would be more accurate to amortize them over the validity period, especially given the fact that employees move around a bit between companies and their number fluctuates throughout the year.

This way, from a profit and loss and standpoint, no company is bearing the expenses of the other.

One of the opinions I got is that it is absolutely wrong as per the international standards to amortize the costs of the labor card, residency fees, and so on and they should be written off completely as incurred. To me, I care about both accuracy of representation and conformation to the international standards.

As long as amortizing them is not wrong as per international standards, then I think all is fine. Otherwise, I need to figure out a way to share these expenses between these sister companies.

 

[Fidget]

I can't think of anywhere in IFRS that expressly prohibits treating those costs as prepayments. Licenses most certainly are able to be treated as prepayments and released to the accounts over the period they cover, so I don't see why you can't treat the others the same. It's not as if you're trying to capitalise them.

 

[ash_arani]

I see. Thank you very much Fidget