In the previous fiscal year, we incorrectly expensed the creation costs of certain assets in the current period. Under correct accounting treatment, these costs should have been capitalized rather than expensed.

My understanding is that for tangible assets, we can make a retrospective correction through the following journal entry:

  • Debit: Asset (relevant asset account)
  • Credit: Retained earnings

However, I have been informed that this treatment does not apply to intangible assets. But the advisor did not explain why, and I cannot contact them, nor can I determine whether their statement is correct.

Therefore, I would like to ask everyone:

  1. Are both of the above treatments (for tangible and intangible assets) correct?
  2. If not, what is the reason?
  3. Please cite explanations from relevant accounting standards as a basis.

The following is a preliminary analysis:

I. Basic principles of correction of accounting errors

According to International Accounting Standard 8 - Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8), prior period errors should be corrected retrospectively, unless it is impracticable to determine the effect of the error. The retrospective restatement method requires adjusting the prior period amounts of comparable periods as if the prior period error had never occurred.

Therefore, when capital expenditures were incorrectly expensed in the previous year, they should be corrected to assets, and retained earnings (or related equity accounts) should be adjusted to reflect the correct opening balance.

II. Treatment of tangible assets

For tangible assets (such as fixed assets), when their costs meet the definition of an asset and satisfy the recognition criteria, they should be capitalized. In the correction, debiting fixed assets and crediting retained earnings is generally accepted because the asset has physical form and the likelihood of future economic benefits flowing in is high.

III. Differences in treatment of intangible assets

For intangible assets, the recognition criteria are more stringent. According to International Accounting Standard 38 - Intangible Assets (IAS 38), an intangible asset is recognized only when the following conditions are met:

  • It is probable that future economic benefits from the asset will flow to the entity;
  • The cost of the asset can be measured reliably.

In addition, for internally generated intangible assets, IAS 38 also specifies a distinction between the research phase and the development phase; only expenditures in the development phase can be capitalized when specific conditions are met. If the creation costs of intangible assets were incorrectly expensed in the previous year, it may mean that the capitalization conditions were not met at that time, or the related expenditures belonged to the research phase, and therefore cannot be retrospectively capitalized.

Therefore, the advisor may believe that for intangible assets, a simple correction by debiting assets and crediting retained earnings is not possible, because it requires reassessing whether the recognition criteria are met, and may involve a reassessment of prior judgments, which is generally not permitted.

IV. Conclusion and recommendations

In summary, the correction treatment for tangible assets is generally feasible, while the correction for intangible assets requires caution and should be judged based on the recognition criteria of IAS 38. It is recommended to consult a professional accountant or auditor and review the specific provisions of the relevant standards.

I hope the above analysis is helpful to you.