Public Company Ltd. is a large, publicly held company with shares actively traded on the Toronto Stock Exchange and that has earnings before tax of S300 million per year.
Public Company has spent $45 million in the current year to improve basic literacy skills of its employees (i.e., reading, writing, and arithmetic) to allow the introduction of high- tech, computerized, automated equipment. Without this training, efficient and effective implementation of the new production process is unlikely to occur. Management of Public Company proposes that the entire amount be capitalized and amortized over the next 15 years (the estimated average remaining working life of the trained workers).
The partner in charge of Public Company’s external audit has approached you to prepare a memo for her on this matter. The memo should identify and discuss important theoretical and practical issues that might influence her, as the external auditor, as to whether she is prepared to accept Public Company’s proposal as appropriate accounting for this S45-million expenditure. If she rejects the proposal, the alternative is to expense the training costs.
Required:
Identify important concepts, principles, and ideas that you should incoqxirate into your memo.