Question Tag: IAS 38

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FR – Nov 2024 – L2 – Q2c – Intangible Assets and Their Measurement

Determining the correct accounting treatment for various intangible assets in Dolo LTD's financial statements, including licensing, software, and book rights.

Question

Question:

Dolo LTD, a market leader in the pharmaceutical industry, incurred the following expenditures during the financial year ended 31 December 2023:

Expenditure Item	Amount (GH¢’000)	Additional Information
Licence to operate in the pharmaceutical industry (10-year validity from January 2023)	200	Intangible asset
Costs incurred in setting up a website for a new product	20	The website will be developed in 2024
Purchase of 295 personal computers on 1 July 2023 (three-year useful life)	840	Excludes software costs
Windows operating system (for 295 PCs)	530	Perpetual software license
Microsoft Office software (for 295 PCs)	24	Three-year software license
Induction training for new staff	430	Staff training for new hires
Book rights purchased from another entity a few years ago	90	The rights have an indefinite useful life
Independent valuation of book rights as of 31 Dec 2023	240	Valued by an independent expert

Dolo LTD’s policy is to use the revaluation model for intangible assets where a market valuation is available.

Required:
Determine the carrying amount of intangible assets at 31 December 2023, in accordance with IAS 38 – Intangible Assets and IFRS.

Answer

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Tags: Amortization, Capitalization, IAS 38, Intangible Assets, Licensing, Revaluation Model, Software Costs, Valuation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: Nov 2024

CR – May 2015 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Discuss implications of changes in accounting policy for intangible assets and demonstrate retrospective application in financial statements.

Question

LIKELY EFFECT LIMITED

Likely Effect Limited has shown a sincere intention to be IFRS compliant. Among a number of events and transactions, there is the need to change the accounting policies of the company in trying to comply with a few other standards. As the Consultant of the company, your attention was drawn to the fact that prior to 2013, the company had capitalized training costs.

According to IAS 38, training cost is regarded as an internally generated intangible asset and cannot be capitalized. Therefore, there is the need for a change of accounting policy which must be applied retrospectively.

The training costs capitalized in 2012 was N6m while the total for periods before 2012 was N12m.
Training costs incurred in 2013 is N4.5m. Retained earnings were N600m and N649m at the beginning and end of 2012 respectively. The corporate income tax rate is 30% for the relevant periods. Additional information available is given below:

	2013 (N’M)	2012 (N’M)
Income tax expense	24	21
Profit after tax	56	49
Share capital	50	50

Required:

(a) Advise the directors on the implication of the change in accounting standard relating to treatment of intangible assets and tax effect on the company. (5 Marks)

(b) Prepare statements of profit or loss and other comprehensive income and changes in equity showing a retrospective application of the change in policy. (7 Marks)

Answer

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Tags: Accounting Policy Change, Financial Reporting Adjustments, IAS 38, IAS 8, Intangible Assets, Retrospective Adjustment, Tax Effects, Training Costs
Level: Level 3

Topic: Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

AA – Nov 2023 – L2 – Q6 – Audit of Financial Statements

Assessing development costs under IAS 38 and audit tests for verification.

Question

Your client, Picturescope Limited, intends to produce a motion picture titled “Naija Power”. The development costs before presentation to investors for financing the production is estimated to be N15 million.

Required:

a. As the assurance provider, assess the situation to confirm that the amount spent so far can be recognised as development costs within the provisions of IAS 38 – Intangible Assets.
(6 Marks)

b. Explain the audit tests that you would perform in respect of the development costs expended so far.
(9 Marks)

Answer

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Tags: Audit Procedures, Development Costs, IAS 38, Recognition Criteria
Level: Level 2

Topic: Audit of Financial Statements

FR – Nov 2022 – L2 – Q5 – Professional Behaviour and IAS 38 Conditions

Discuss professional behaviour and threats for accountants, and conditions for recognizing development costs.

Question

(a) Explain briefly what is meant by professional behaviour and outline THREE threats that could affect the work of professional accountants. (5 Marks)

(b) IAS 38 prescribes the requirements for reporting intangible assets in the financial statements of an entity.

Required:
i. Explain FIVE conditions under which development costs can be recognised as intangibles in financial statements. (5 Marks)

ii. Highlight FIVE conditions, which should be considered to determine the useful life in the amortisation of intangible assets in the financial statements. (5 Marks)

Answer

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Tags: Development Costs, Ethical Threats, IAS 38, Intangible Assets, Professional Behaviour
Level: Level 2

Topic: Ethical Issues in Financial Reporting, Intangible Assets (IAS 38)
Series: NOV 2022

FR – May 2024 – L2 – SB – Q7 – Impairment of Assets (IAS 36)

Discuss the measurement models for intangible assets and calculate the carrying amount and revaluation surplus for Olumo-Taxi Limited.

Question

a. IAS 38 – Intangible Assets allows a business to choose one of two measurement models as its accounting policy for intangible assets after acquisition. However, the same model should be applied to all assets in the same class.

Required:
Discuss the TWO measurement models for intangible assets. (3 Marks)

b. Olumo-Taxi Limited’s financial year ends on December 31. The company adopted the revaluation model for its intangible assets and revalues them on a regular three-year cycle.

However, for intangible assets with a finite life, Olumo-Taxi Limited transfers the relevant amount from revaluation reserve to retained earnings each year.

During the year 2019, Olumo-Taxi Limited incurred N700,000 on the process of preparing an application for licenses for 15 taxis to operate in a holiday resort very close to Abeokuta. In order to prevent congestion and excessive traffic pollution, the licensing authority only allowed a small number of taxis to operate.

The outcome of the company’s application was uncertain up to November 30, 2019, when the local government authority accepted its application. In December 2019, Olumo-Taxi Limited incurred a cost of N90,000 in registering its licenses. The licenses were for a period of 9 years from January 1, 2019.

The licenses are freely transferable, and an active market in them exists. The fair value at December 31, 2019, was N94,500 per taxi, and Olumo-Taxi Limited carried them at fair value in its statement of financial position at December 31, 2019.

At December 31, 2022, Olumo-Taxi Limited undertook its regular revaluation. On that date, the licensing authority announced that it would triple the number of licenses offered to taxi operators, and there were transactions in the active market for licenses with six years to run at N45,000.

Required:
Calculate, with explanations, the carrying amount and revaluation surplus of the intangible assets of Olumo-Taxi Limited according to IAS 38 as at:
i. December 31, 2019
ii. December 31, 2022 (before regular revaluation)
iii. December 31, 2022 (after regular revaluation)
(12 Marks)

Answer

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Tags: Amortization, IAS 38, Intangible Assets, Measurement Models, Revaluation
Level: Level 2

Topic: Impairment of Assets (IAS 36)
Series: MAY 2024

CR – Nov 2020 – L3 – Q2a – Intangible Assets

Prepare a note reconciling the carrying amount of Katamanso’s intangible assets, including website development costs and copyright extension fees.

Question

Katamanso Ltd (Katamanso) is a company which is a subsidiary of a media company. Katamanso’s principal asset is the rights it owns to a classic film. Katamanso had the following intangible assets as at the year end 31 December 2017:

Intangible Asset	Cost (GH¢’000)	Accumulated Amortisation (GH¢’000)	Carrying Amount (GH¢’000)
Classic Film	10,000	(6,000)	4,000
Website	150	(90)	60
Total	10,150	(6,090)	4,060

The following information includes all relevant events that occurred during the year ended 31 December 2018:

i) The film was originally published on 1 January 1970 and the rights were acquired by Katamanso on 1 January 2015 for GH¢10 million. Copyright was set at 50 years from the date the film was originally published. The film was amortized by Katamanso using the straight-line method over the remaining copyright period. However, recent legislative changes passed on 1 January 2018 have extended the copyright period from 50 years to 70 years, subject to payment of a registration fee prior to the original expiry date. This, together with associated legal costs, amounted to GH¢70,000 and was paid on 1 January 2018. As a result, the market value of the rights to the film was GH¢12.1 million at 31 December 2018, according to Katamanso’s professional valuers, who determined the valuation on 1 January 2018.

ii) During the year Katamanso developed a new interactive website to market the film and associated merchandise given its extended copyright period. The website includes its own e-commerce system for online DVD sales, direct streaming of the film, associated material, and merchandise sales. The costs incurred are as follows:

Website Development Costs	Amount (GH¢’000)
Planning the new website	8
Registration of domain names	18
Internal design costs	85
External contractor design costs	112
New content development	38
Advertising of the new website	22

The new website went live on 1 July 2018 and the old website, which was being amortised using the straight-line method over five years, was taken offline on that date and will not be used for any other purpose.

Required:
Prepare a note reconciling the carrying amount of Katamanso’s intangible assets from the beginning to the year ended 31 December 2018 as required by IAS 38: Intangible Assets.
(Note: Comparative information is not required. All amounts are material.)

Answer

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Tags: Amortization, Development Costs, IAS 38, Intangible Assets
Level: Level 3

Topic: IAS 38: Intangible assets
Series: NOV 2020

FR – MAY 2021 – L2 – Q5c – Intangible Assets Accounting

Explain accounting for manufacturing software and training costs as per IAS 38.

Question

Sawla Ltd (Sawla) prepares financial statements under International Financial Reporting Standards (IFRSs). On 1 June 2020, Sawla acquired a manufacturing software at the cost of GH¢1.5 million. The software is estimated to have a useful economic life of 5 years with no residual value. To develop staff capacity to a higher level, a training program was organised for production staff on the use of the software at a cost of GH¢250,000 during the year. Management is convinced the staff training will generate more revenue for the entity through future economic benefits. Sawla intends to adopt the revaluation model under IAS 38 Intangible Assets and to revalue the software at the end of each year. Accordingly, the software was valued by a software engineer at GH¢1.7 million on 31 December 2020. Sawla accepted this value and decided to incorporate the valuation in the financial statements.

Required:
In accordance with IAS 38: Intangible Assets, explain how to account for the above transactions for the year to 31 December 2020.
(5 marks)

Answer

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Tags: Accounting Standards, IAS 38, Intangible Assets, Revaluation Model, Training Costs
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2021

FR – May 2019 – L2 – Q7b – Impairment of Assets (IAS 36)

Preparation of financial statements extracts for intangible assets and associated costs for Soft Solutions Limited.

Question

b. During the year ended 31 December, 2018 Soft Solutions Limited carried out
the following transactions:

N720m was spent on developing a new “Microfinance Software” which
received the approval of software regulatory authority in Nigeria on 1 July,
2018 and is proving commercially successful.
The financial controller expects the project to be in profit within 12 months
of the approval date. The patent was registered with Federal Ministry of
Trade and Investment on 1 July, 2018; it costs N180m and remains in force
for three years.
On 1 September, 2018 Soft Solutions Limited acquired an up to date list of
Global Positioning System (GPS) at a cost of N60m and the company has
been visiting the tracked customers to explain the operations of the new
microfinance software in rural and urban areas. This is expected to generate
sales throughout the life-cycle of the microfinance software.
A research project was set up on 1 October, 2018 which is expected to result
in a new banking software called “Recent Bankers”. N24m was spent on
computer equipment and N48m on staff salaries. The equipment has an
expected life of four years

Required:

Using the above information:
i. Prepare the extract of statement of financial position of Soft Solutions
Limited as at 31 December, 2018. (5 Marks)
ii. Prepare the summary of the cost to be charged to statement of profit or
loss for the year ended 31 December, 2018. (2 Marks)

Answer

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Tags: Capitalization, Financial Position, IAS 38, Intangible Assets, Profit or Loss
Level: Level 2

Topic: Impairment of Assets
Series: MAY 2019

FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

Question

Soft Solutions Limited is a Nigerian company that specializes in the development of software applications. The company has been in operation for over 16 years and has invested considerable amounts of money internally in developing accounting and banking software. The treatment of these assets is prescribed by IAS 38 – Intangible Assets.

Required:
a. As a partly qualified accountant working in the accounts department of Soft Solutions Limited, the financial controller of the company asked you for a memo which addresses the following:
i. Whether internally developed intangible assets should be recognized and, if so, how should they be recorded initially and subsequently accounted for. (5 Marks)
ii. The criteria for revaluation of intangible assets? (3 Marks)

Answer

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Tags: Capitalization, Development Costs, IAS 38, Intangible Assets, Recognition Criteria
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: MAY 2019

AA – Nov 2018 – L2 – Q5 – Audit Evidence

Outline the audit tests for purchased goodwill and development projects, and the conditions for recognizing development projects in financial statements.

Question

The intangible assets that can be recognized in the statement of financial position are purchased goodwill, intangibles having a readily ascertainable market value, and development costs.

Required:
a. State five audit tests required to obtain audit evidence on purchased goodwill.
(5 Marks)

b. Identify five audit tests relevant to obtaining evidence on development projects.
(5 Marks)

c. Itemize five conditions that must be fulfilled before development projects can be recognized in the financial statements.
(5 Marks)

Answer

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Tags: Audit evidence, Development Costs, IAS 38, Intangible Assets, Purchased Goodwill
Level: Level 2

Topic: Audit evidence
Series: NOV 2018

FR – Nov 2018 – L2 – SC – Q6c – Presentation of Financial Statements (IAS 1)

Identify four internally generated intangible assets that are prohibited under IAS 38.

Question

Identify four internally generated intangible assets that are prohibited from being recognized as assets under IAS 38.

Answer

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Tags: IAS 38, Intangible Assets, Internally Generated Assets
Level: Level 2

Topic: Presentation of Financial Statements (IAS 1)
Series: NOV 2018

AA – May 2020 – L2 – Q3b – Audit and Assurance Risk Environment

Describe how you would verify the patents appearing in the financial statements of Tamale Pharma.

Question

Tamale Pharma specializes in the development of drugs for the pharmaceutical industry.

Required:
i) State how you could verify the following item appearing in the statement of financial position of Tamale Pharma as at 31 December 2018:

Patents.
(3.5 marks)

ii) State how you could verify the following item appearing in the statement of financial position of Tamale Pharma as at 31 December 2018:

Research and development.
(3.5 marks)

Answer

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Tags: Audit Procedures, IAS 38, Intangible Assets, Research and Development, Verification
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: MAY 2020

FR – May 2018 – L2 – Q2d – Financial Reporting Standards and Their Applications

Discuss the accounting treatment for the revaluation of an intangible asset for 2016 and 2017 in accordance with IAS 38.

Question

Delali Ltd adopts the revaluation model for subsequent measurement of its intangible assets in accordance with IAS 38: Intangible Assets. The policy of Delali is to revalue its intangible asset at the end of each year. An intangible asset with an estimated useful life of 9 years was acquired on 1 January 2016 for GH¢45,000. It was revalued to GH¢54,400 on 31 December 2016, and the revaluation surplus was correctly recognized on that date. As at 31 December 2017, the asset was revalued at GH¢32,000.

Required:
Discuss the accounting treatment required in the 2016 and 2017 financial statements. (4 marks)

Answer

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Tags: Amortisation, IAS 38, Intangible Assets, Revaluation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2018

CR – Nov 2018 – L3 – Q2d – IAS 38: Intangible assets

Recommend the carrying amount of various intangible assets, including licenses, software, and rights, in the financial statements of Nyame Ltd for the year ended 31 December 2017.

Question

Nyame Ltd incurred the following expenditure during the year:

The company’s policy is to use the revaluation model for its intangible assets where a market valuation is available and permitted.

Required:
Recommend with suitable calculations the carrying amount of intangible assets at the end of the year 31 December 2017 according to the guidance given in IAS 38: Intangible Assets.
(5 marks)

Answer

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Tags: IAS 38, Intangible Assets, Licenses, Revaluation Model, Software, Website Costs
Level: Level 3

Topic: IAS 38: Intangible assets
Series: NOV 2018

CR – Nov 2021 – L3 – Q2c – IAS 38: Intangible Assets

Advise Zunka Ltd on how to account for the cost of adapting equipment and the provision for potential damages in a legal case for patent infringement.

Question

Zunka Ltd (Zunka) is a private pharmaceutical company in Ghana, which imports medical equipment manufactured under a patent. Zunka subsequently adapts the equipment to fit the market in Ghana and sells the equipment under its own brand name. Zunka originally spent GH¢6 million in developing the know-how required to adapt the equipment, and, in addition, it costs GH¢100,000 to adapt each piece of equipment. Zunka has capitalised the cost of the know-how and the cost of adapting each piece of equipment sold as patent rights.

Zunka is being sued for patent infringement by Sajida Ltd (Sajida), the owner of the original patent, on the grounds that Zunka has not materially changed the original product by its subsequent adaptation. If Sajida can prove infringement, the court is likely to order Zunka to pay damages and stop infringing its patent. Zunka’s lawyers are of the view that the court could conclude that Sajida’s patent claim is not valid.

Sajida has sued Zunka for GH¢10 million for using a specific patent and a further GH¢16 million for lost profit due to Zunka being a competitor in the market for this product. Zunka has offered GH¢14 million to settle both claims but has not received a response from Sajida.

As a result, the directors of Zunka estimate that the damages it faces will be between the amount offered by Zunka and the amount claimed by Sajida. The directors of Zunka would like advice as to whether they have correctly accounted for the costs of the adaptation of the equipment and whether they should make a provision for the potential damages in the above legal case in the financial statements for the year ended 31 March 2021.

Required:

Advise the directors of Zunka on how the above transaction should be accounted for in its financial statements for the year ended 31 March 2021 in accordance with relevant International Financial Reporting Standards (IFRS).

Answer

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Tags: Capitalization, Contingent Liabilities, IAS 37, IAS 38, Intangible Assets, Legal Cases, Patent Infringement, Provisions
Level: Level 3

Topic: IAS 38: Intangible assets
Series: NOV 2021

Question Tag: IAS 38

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FR – Nov 2024 – L2 – Q2c – Intangible Assets and Their Measurement

Determining the correct accounting treatment for various intangible assets in Dolo LTD's financial statements, including licensing, software, and book rights.

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CR – May 2015 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Discuss implications of changes in accounting policy for intangible assets and demonstrate retrospective application in financial statements.

Required:

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AA – Nov 2023 – L2 – Q6 – Audit of Financial Statements

Assessing development costs under IAS 38 and audit tests for verification.

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FR – Nov 2022 – L2 – Q5 – Professional Behaviour and IAS 38 Conditions

Discuss professional behaviour and threats for accountants, and conditions for recognizing development costs.

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FR – May 2024 – L2 – SB – Q7 – Impairment of Assets (IAS 36)

Discuss the measurement models for intangible assets and calculate the carrying amount and revaluation surplus for Olumo-Taxi Limited.

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CR – Nov 2020 – L3 – Q2a – Intangible Assets

Prepare a note reconciling the carrying amount of Katamanso’s intangible assets, including website development costs and copyright extension fees.

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FR – MAY 2021 – L2 – Q5c – Intangible Assets Accounting

Explain accounting for manufacturing software and training costs as per IAS 38.

Required: In accordance with IAS 38: Intangible Assets, explain how to account for the above transactions for the year to 31 December 2020. (5 marks)

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FR – May 2019 – L2 – Q7b – Impairment of Assets (IAS 36)

Preparation of financial statements extracts for intangible assets and associated costs for Soft Solutions Limited.

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FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

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AA – Nov 2018 – L2 – Q5 – Audit Evidence

Outline the audit tests for purchased goodwill and development projects, and the conditions for recognizing development projects in financial statements.

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FR – Nov 2018 – L2 – SC – Q6c – Presentation of Financial Statements (IAS 1)

Identify four internally generated intangible assets that are prohibited under IAS 38.

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AA – May 2020 – L2 – Q3b – Audit and Assurance Risk Environment

Describe how you would verify the patents appearing in the financial statements of Tamale Pharma.

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FR – May 2018 – L2 – Q2d – Financial Reporting Standards and Their Applications

Discuss the accounting treatment for the revaluation of an intangible asset for 2016 and 2017 in accordance with IAS 38.

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CR – Nov 2018 – L3 – Q2d – IAS 38: Intangible assets

Recommend the carrying amount of various intangible assets, including licenses, software, and rights, in the financial statements of Nyame Ltd for the year ended 31 December 2017.

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CR – Nov 2021 – L3 – Q2c – IAS 38: Intangible Assets

Advise Zunka Ltd on how to account for the cost of adapting equipment and the provision for potential damages in a legal case for patent infringement.

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Required:
In accordance with IAS 38: Intangible Assets, explain how to account for the above transactions for the year to 31 December 2020.
(5 marks)