- 7 Marks
Question
Mankeni Ltd (Mankeni) is one of Africa’s leading entertainment companies which creates and secures the rights to phenomenal content from all over the world. Mankeni has entered into the following transactions during the financial year ended 30 November 2023:
i) On December 1, 2022, Mankeni purchased the sole West African distribution rights for a special digital set-top box for home entertainment. The rights were purchased for GH¢5.25 million over a three-year period.
(3 marks)
ii) Mankeni started working on building the brand and increasing sales of the item mentioned in (i) above on December 1, 2022. Due to the enormous success of this endeavour, the “Mankeni” brand became popular. Mankeni wishes to include the brand in its financial statements for the year ended 30 November 2023 at its estimated fair value of GH¢30 million.
(2 marks)
iii) Mankeni wishes to replicate its West African success in Eastern African countries by selling the product in other markets. The company has spent GH¢1.25 million during the year researching the Eritrea market and wishes to capitalise this expenditure as an intangible asset.
(2 marks)
Answer
i) This is an intangible asset, acquired as a separate asset for cash consideration. This should be capitalised at cost, GH¢5.25 million. The asset should be amortised over its useful economic life, in this case 3 years.
Amortisation to be charged in the year ended 30 November 2023 is GH¢1.75 million.
On initial recognition
Dr Intangible asset GH¢5.25m
Cr Cash GH¢5.25m
At the end of each year
Dr Profit or loss GH¢1.75m
Cr Accumulated amortisation – intangible asset GH¢1.75m
ii) The Mankeni Ltd brand falls into the category of an internally generated intangible asset. Under IAS 38, internally generated assets cannot be recognised unless they can be valued by reference to an active market in identical assets. Since every brand is unique, there cannot, by definition, be an active market in identical assets. The development of a brand does not meet the criteria for capitalising development costs. Hence, the costs of developing the brand must be expensed, and the fair value of the brand may not be recognised under IAS 38.
iii) The expenditure on researching the Eritrea market falls into the category of market research. IAS 38 specifically precludes the capitalisation of market research costs. Hence, the GH¢1.25 million must be expensed as incurred.
- Topic: Financial Reporting Standards and Their Applications
- Series: MAR 2024
- Uploader: Dotse