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CMP Chapter 12 Question 3

J

Jamie

Member
Hi,

I was wondering why the cost of building an extension to the freehold buildings is not considered an expense and therefore charged to the P&L.

Is this because we do not know enough about how the extension was funded (ie. credit) or is there something to do with the fact it relates to non-current assets? Therefore it would make more sense to update the valuation in the balance sheet.

Jamie
 
It's because the extension is a non-current asset. The cost of building the extension is added to non-current assets as it's an asset that will be used in the business for a number of years. The cost will be recognised on the P&L, but this is via depreciation over the asset's useful economic life.

The way the purchase of the asset was funded doesn't affect the treatment of the asset - if the company has purchased an asset that's going to be used in the business for >1 year, then it's a non-current asset. If it's a short-term asset like stock then the cost is usually recognised on the P&L in full once the asset is used up - in the case of stock, it's under cost of sales (ie stock used = opening stock + purchases - closing stock).

I hope that helps!
 
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