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To whom it may concern,
I would very much appreciate your help with this question. Specifically, I can’t wrap my head as to why the fair value of the building of $1.5million is capitalized.
I understand the that after fulfilling the condition given by the benefactor, the asset can be recognized in the SOFP. I also understand that the $1 million spent on refurbishment of the asset is a capital expenditure to bring the asset into its present condition.
However, what is the rationale of capitalizing the fair value of $1.5 million? And why is a corresponding entry made to the SOPL? Please help me.
As per IAS 16, we know that cost is defined as cash and cash equivalent paid, plus the fair value of any other consideration transferred by the entity. In this case, the entity got the asset for free, so shouldn’t the cost be zero, plus 1 million capital expenditure to arrive at a cost of 1 million?
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