Quick fix Ltd is a manufacturing company engaged in the production of adhesives. The company has not performed well over the past three financial years. So as to improve on the poor past profits, the board approved a R1 000 000 advertising promotion during the year ended 31 December 2018 in order to generate increased sales in the future. The advertising promotion took place (and was paid for) during December 2018. The accountant insists on recognizing the R1 000 000 payment as an asset at 31 December 2018. His reasoning is that future sales will increase as the number of customers grows due to the advertising campaign.

Required:

1.1 Discuss whether you agree with the accountant, making reference to the framework. Provide an alternate treatment if you disagree. (20)

(The criteria for answering 1.1 is as follows.

Understand the 5 elements of accounting - assets, equity, liabilities, income and expenses.

When theory type questions based on the elements of the financial statements are given, the definition of the element must be discussed and applied as well as the recognition criteria.

You must first break down each component of the definition and then apply it to the question.

After applying the definition, the recognition criteria must be met.

Only once the definition and the recognition criteria are met then only will you recognise that element in the financial statements.)

1.2 One of the most important characteristics that a set of financial statements should have is reliability. Explain in terms of the framework, how to ensure that a set of financial statements is reliable.