- 15 Marks
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 year 2019 Olumo-Taxi Limited incurred N700,000 on the process of preparing an application for licences for 15 taxis to operate in a holiday resort very close to Abeokuta, In order to prevent congestion and excessive traffic pollution, the licencing authority only allowed a small number of taxi 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 licences. The licences were for a period of 9 years from January 1, 2019.
The licences 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 licences offered to taxi operators and there were transactions in the active market for licences which has 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
a. (i) Cost model
• An intangible asset is carried at cost less accumulated amortisation and any accumulated impairment losses after initial recognition.
(ii) Revaluation model
• Intangible assets can be revalued according to the same rules as those applied to the revaluation of property, plant and equipment.
• An intangible asset is carried at a revalued amount (its fair value at the date of the revaluation less any subsequent accumulated amortisation and any accumulated impairment losses). • This is only allowed if the fair value can be determined by reference to an entire market in that type of intangible assets.
b. Calculation and explanation of the carrying amount and revaluation surplus of the intangibles
i) Carrying amount as at December 31, 2019
N Cost of registering licence 90,000 Revaluation surplus account [N94,500 x 15 – N90,000] 1,327,500 Carrying amount Dec 31, 2019 (Fair value) 1,417,500
Explanations:
- The initial cost of N700,000 incurred should be written off into the statement of profit or loss because the generation of its future economic benefits is not probable then.
- The fair value of the licence as at December 31, 2019 would be N1,417,500 [N 94,500 x 15 taxis] since the cost is N90,000 the revaluation reserve account will be credited with N1,327,500 and intangible asset debited with same amount.
ii) Calculation as at December 31, 2022 (Before regular revaluation)
Explanations:
- The accumulated amortisation on the revalued amount for 3 years will be;
(N1,417,500 x 3/9) = N472,500 whereas, the accumulated amortisation would have been (N90,000 x 3/9) = N30,000
Carrying amount:
N Bal. B/fwd (Jan 1. 2020) 1,417,500 Less: Amortisation (472,500) Carrying amount 945,000 Revaluation surplus (Jan 1, 2020) 1,327,500 Transfer to retained earnings (N1,327,500 x 3/9) (442,500) Revaluation surplus bal. Dec 31, 2022 885,000
iii) Calculation as at December 31 2022 (After regular revaluation)
- Carrying amount of the licence immediately before revaluation is
N945,000 (N1,417,500 – N472,500)
- The revalued carrying amount is N675,000 (N45,000 x 15)
:. There is a deficit of (N945,000 – N675,000) = N270,000 which should be recognised in the revaluation reserve.
:. Revaluation reserve:
N Bal. B/fwd regular revaluation 885,000 Less deficit (270,000) Revaluation reserve Dec 31, 2022 615,000
Carrying amount N675,000
- Topic: Intangible Assets (IAS 38)
- Series: MAY 2024
- Uploader: Samuel Duah