Question

Describe the evaluation that must be made when determining if costs should be classified as a capital expenditure or an immediate expense.

Please no hand-written answers. I do not want to have to translate the answer.

Answer 1

Key criteria that go into determining whether an expenditure if capital expenditure are as follows:

- The expenditure should benefit the entity for more than one accounting period

- It should meet the definition of an asset, i.e. resource controlled by an entity from which the entity can expect inflow of future economic benefits.

- The expenditure should either create a new asset of enhance the productivity or life of an existing asset. Expenditure to simply maintain the existing capacity or condition of asset is not a capital expenditure.

Above are general points to be considered for capitalisation of expenditure. If any of the above criteria is not met, it is unlikely that the expenditure can be capitalised. In sch cases, expenditure is directly charged to the profit and loss account, i.e. revenue expenditure.

Please comment for any further clarifications