- 6 Marks
Question
Oyarefa Ltd acquired 80% ordinary shares in Abokobi Ltd on 1 January 2015. The intangible assets of Abokobi Ltd include GH¢9 million of training and marketing expenditure incurred during the year ended 31 December 2016. The Directors of Abokobi Ltd believe that these should be capitalised as they relate to the startup period of a new business venture in Oyibi, and they intend to amortise the balance over the five years commencing 1 January 2017.
On 1 July 2016, Oyarefa Ltd purchased a customer list from the liquidator of a competitor. The price paid was GH¢4 million and was based on the list having a useful life of two years. At 31 December 2016, the Finance Director of Oyarefa Ltd commissioned a report on the value of the customer list from a firm of independent valuers. The firm has valued the customer list at GH¢5 million and estimates a total useful life of five years. The customer list is currently included in intangible assets at a carrying value of GH¢4 million, but the Finance Director wants the list to be revalued to the higher amount.
Required:
Recommend the treatment of the above in the consolidated financial statements for Oyarefa Ltd Group for the year ended 31 December 2016 in accordance with IAS 38: Intangible Assets.
Answer
- Training and Marketing Expenditure:
According to IAS 38: Intangible Assets, start-up, training, and promotional costs should be expensed as incurred because no intangible asset is created that can be recognized (the benefits cannot be sufficiently distinguished from internally generated goodwill, which is not recognized). Therefore, Abokobi Ltd’s GH¢9 million training and marketing costs should not be capitalized but rather written off as an expense. This would reduce Abokobi Ltd’s retained earnings by GH¢9 million and also reduce the intangible assets of Abokobi Ltd by the same amount. - Customer List:
The customer list purchased by Oyarefa Ltd meets the criteria for recognition under IAS 38 as an intangible asset since it was purchased from a third party, making it an identifiable, non-monetary asset. The asset should be capitalized at its purchase price of GH¢4 million. Given that the customer list has an estimated useful life of two years, it should be amortized over this period. Therefore, the correct amortization charge for the year ended 31 December 2016 is GH¢1 million (GH¢4 million / 2 years x 6/12 months).However, the revaluation to GH¢5 million cannot be recognized under IAS 38 because customer lists are not allowed to be revalued under the standard. Thus, the carrying value of the customer list should remain at its purchase cost of GH¢4 million, and no revaluation should be recorded.
Journal Entry:
- Debit: Distribution and Administration Costs (SPLOCI) GH¢1 million
- Credit: Intangible Assets (SFP) GH¢1 million
(6 marks)
- Topic: IAS 38: Intangible assets
- Series: NOV 2017
- Uploader: Dotse