Treatment of Capital Expenditure

Treatment of Capital Expenditure - Printable Version

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Treatment of Capital Expenditure - Muhammad Zahid - 01-06-2006

It has been seen that in case of non profit organisation most of the organisation treat their capital expenditure as revenue expenditure and expense out that amount in the year it is purchased is it a fair treatment? if not what are the implication of this treatment in terms of local law & regulations and IAS.

Zahid

- Ali Akbar - 01-07-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Muhammad Zahid
 It has been seen that in case of non profit organisation most of the organisation treat their capital expenditure as revenue expenditure and expense out that amount in the year it is purchased is it a fair treatment? if not what are the implication of this treatment in terms of local law & regulations and IAS.

Zahid
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AoA

Can you give specific example of the situation quoted by you? Please explain.

ICAPians, the unparalleled..

- Muhammad Zahid - 01-09-2006

NRSP is a big organisation they would have proper accounting policies but i am talking about small and medium size organisations where financial policies cease to exist. For instance i evaluated a medium size organisation in Lahore where they were not keeping the record of Fixed Assets rather they were expense out the entire amount of their capital and Medical equipment in the year of purchase. They just maintaining receipt and Payment Account and their auditor still manage to prepare Balance sheet with fixed assets schedule.
I wish to know that is it in accordance with the prevalent rule and regulation and IAS. If not where they have made departure from the said IAS

Zahid

- Ali Akbar - 01-09-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Muhammad Zahid
 NRSP is a big organisation they would have proper accounting policies but i am talking about small and medium size organisations where financial policies cease to exist. For instance i evaluated a medium size organisation in Lahore where they were not keeping the record of Fixed Assets rather they were expense out the entire amount of their capital and Medical equipment in the year of purchase. They just maintaining receipt and Payment Account and their auditor still manage to prepare Balance sheet with fixed assets schedule.
I wish to know that is it in accordance with the prevalent rule and regulation and IAS. If not where they have made departure from the said IAS

Zahid
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Its not only the case with small NGOs/NPOs, many of the small entities are in the same practice.

As far as the non compliance is concerend. Such organizations are voilating the essence of the Framework to the International Accounting Standards, they are non compliant with the requirments of IAS 16. According to the Framework, non compliance with any Standard means that Financial Statemnts are not prepared in line with the prevailing IAS in the country. Strictly speaking treating capital expenditure (fixed assets)as running expenditue is against the matching concept, becoz charging it in the year of purchase to P&L doesnt match with economic benefits expected to arise from it over several years, so thats y assets r depreciated over the years inorder to match the depreciation expense with the economic benefits expected to flow from them to the entity over the years.

Not maintaining proper records of fixed assets results in non compliance with TR 6 of ICAP which is issued pursuant to section 230 of the Companies Ordinance, 1984.

ICAPians, the unparalleled..

- finance - 01-20-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Ali Akbar
Its not only the case with small NGOs/NPOs, many of the small entities are in the same practice.

As far as the non compliance is concerend. Such organizations are voilating the essence of the Framework to the International Accounting Standards, they are non compliant with the requirments of IAS 16. According to the Framework, non compliance with any Standard means that Financial Statemnts are not prepared in line with the prevailing IAS in the country. Strictly speaking treating capital expenditure (fixed assets)as running expenditue is against the matching concept, becoz charging it in the year of purchase to P&L doesnt match with economic benefits expected to arise from it over several years, so thats y assets r depreciated over the years inorder to match the depreciation expense with the economic benefits expected to flow from them to the entity over the years.

Not maintaining proper records of fixed assets results in non compliance with TR 6 of ICAP which is issued pursuant to section 230 of the Companies Ordinance, 1984.

ICAPians, the unparalleled..
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Agreed.

International Financial Reporting Standards (IAS) are explicit.

There is no room within the standard to allow for the expensing of capital expenditure.
In fact IAS 16 is clear - capital expenditure MUST be capitalised in the balance sheet from inception

- Pracs - 01-20-2006

In most of these NGO's they are required by their Donors to maintain financial records on the basis of 'Receipts and payments' only. Any Financial statements that are prepared, are done soley from extraction (and so mentioned) and may not necessarily be under IFRS.

To most donors, it is only important to see how their money is spent and if its within the charter etc.

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"Failure is a word unknown to me" - M A Jinnah

- Ali Akbar - 01-21-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Pracs
 In most of these NGO's they are required by their Donors to maintain financial records on the basis of 'Receipts and payments' only. Any Financial statements that are prepared, are done soley from extraction (and so mentioned) and may not necessarily be under IFRS.

To most donors, it is only important to see how their money is spent and if its within the charter etc.

-------------------------------------------------------------------------------------------
"Failure is a word unknown to me" - M A Jinnah
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According to my understanding maintaining accounts on receipt and payment basis doesnt mean that you treat capital expenditure as revenue, if it is so, then there would have been no concept of balance sheet!!

As far as the non applicability of IFRSs is concerened on NGOs, if the NGO is registered under section 42 of the Companies Ordinance as not for profit organization(most of the NGOs are), then it shall comply with standards(IFRSs) pursuant to provisions of the Companies Ordinance and 5th schedule thereto.

ICAPians, the unparalleled.

- smraza - 01-27-2006

Dear all,
There are two methods of accounting being following by NGOs, Trusts etc in Pakistan, One the accrual basis of accounting and second cash basis of accounting,
If the accrual basis is being followed then it will present the Balance Sheet and Income and Expenditure Account (together with the notes), It will be capitalizing its fixed assets and allocate the depreciation charge on yearly basis follwoign the matching concept.

If the cash basis of accounting is being followed then only 'Receipt and Payment Account' (together with the notes) will be prepared, irrespective of nature and volume of payments. The NGO will simply show the outflow of cash for the fixed assets purchased during the a particular period.

Thanks,

SMR

- Ali Akbar - 01-29-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by smraza
 Dear all,
There are two methods of accounting being following by NGOs, Trusts etc in Pakistan, One the accrual basis of accounting and second cash basis of accounting,
If the accrual basis is being followed then it will present the Balance Sheet and Income and Expenditure Account (together with the notes), It will be capitalizing its fixed assets and allocate the depreciation charge on yearly basis follwoign the matching concept.

If the cash basis of accounting is being followed then only 'Receipt and Payment Account' (together with the notes) will be prepared, irrespective of nature and volume of payments. The NGO will simply show the outflow of cash for the fixed assets purchased during the a particular period.

Thanks,

SMR
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AoA

If the NGO is duly registered under section 42 of the Companies Ordinance, 1984 then the NGO shall be construed as 'company' for the purpose of applicability of the provisions of Companies Ordinance, 1984 with modification where specified.

It means that NGO registered under section 42 of the Companies ORdinance, 1984 has no option whether to follow accrual basis or cash basis of accounting. NGO shall follow accrual basis of accounting by following IFRS pursuant to provisions of the Companies Ordinance, 1984.

NGOs not registered under section 42 of the Companies Ordinance, 1984 have option whether to follow accrual basis or cash basis of accounting.

And I think the original question raised by Mr. Zahid relates to implication/penalties if the NGO do not follow requirments of IFRS.
Implications have been explianed earlier, (which shall apply only on NGO registered under section 42). Other NGOs following cash basis and are not registered under the Ordinance have no status of 'a company'.

ICAPians, the unparalleled..

- Pracs - 01-30-2006

So the question is Zahid, is the NGO under discussion registered under section 42 of the CO oridnance ??

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"Failure is a word unknown to me" - M A Jinnah

- Muhammad Zahid - 02-01-2006

I think this discussion has made it amply clear thank you

Zahid