Below is a summary of accounting issues raised by the sole shareholder and owner of Gumboots (Pty) Ltd. As part of performing secretarial duties for this company, you have been asked to draft responses to each query raised.

Issue 1 – employee costs

Why is it that I cannot capitalize employee costs? What is stopping me in the accounting standards. I mean my employees are my greatest asset, yet I cannot put their value on my balance sheet. Instead, they are expenses that affect profit and loss. We show our debtors on the balance sheet, why can’t I show other people?

Issue 2 – share based payment reserve.

I know we compensate our employees using a share-based payment scheme. Basically, I give them some shares in my company for them to take a vested interest in my organization. I have looked at the accounting entry (as below) for this transaction (which is in line with the requirements of IFRS 2). I am concerned as the credit side of the journal creates an equity reserve which increases the total balance sheet position. I feel that we are inflating the balance sheet, is this correct?

Dr. Expenses – employee costs Cr. Share based payment reserve.

Issue 3 – Calculation error

I have noted that the motor vehicles should have been depreciated over 5 years and not 7 years as calculated per the financial statements. Below are the details pertaining to the motor vehicles, please can you give me the journal entry to correct this error:

• Cost R1 400 000
• Useful life 5 years but 7 has been used for the past three financial years. The depreciation for this year (year 4) has been included in profit and loss and the balance sheet.
• Residual value is zero and the assets have never been impaired.
• The effects of tax can be ignored for the purpose of this question.

Based on the queries raised by the sole shareholder, prepare a response to the queries raised. Reference should be made to the International Financial Reporting Standards in your response.