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The solution says:
The most appropriate accounting treatment would seem to be for ZCG to record the cost of the right to use the network capacity as a prepayment and recognise the cost in PnL….Questions
(1)Prepayment? WHY?
I thought it to be a “Lease” as there is no transfer of risk and rewards and it is a “right” to use network capacity(2) There is no indication in the question that PAYMENT has been made..it just says ZCG purchased $17.8m of network capacity from a range of suppliers with contract period varying 1-3 years…
(3) How can a prepayment be amortized!
If you could pls explain this scenario…
Please..Thank youThis Q was set before IFRS 16 (i.e. before “right-of-use” was a thing in IFRS).
But I still think prepayment is the correct answer.To “purchase” means to acquire something by paying for it – i.e. Dr something (asset? expense? this is the Q) and Cr Cash/bank.
If you want to try applying IFRS 16, you need first to identify a lease:
“A contract is, or contains, a lease if the contract conveys the right to control the use of AN [i.e. one] identified asset for A period of time [i.e. one] in exchange for consideration.”As you point out the purchase is “from a range of suppliers [so there can’t be just one underlying asset], with the contract periods varying from twelve months to three years [so many more than one periods of time]”.
Amortisation is a general team that means “gradually writing off the initial cost of an asset”. It’s most commonly associated in IFRS with intangible assets but it is widely used in business to refer to the writing down of leasehold properties (where it has the same meaning as depreciation).
There is no reason why it can’t be used with reference to a prepayment but the original answer that I am looking at does not use that term. It says “recognise the cost (i.e. $17.8) in profit or loss on a straight-line basis over the term of the agreements”. So management would need a schedule of the make-up of the total and spread the cost of each part over the appropriate number of months.
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