- 7 Marks
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
The carrying amount of intangible assets for Dolo LTD as of 31 December 2023 is determined as follows:
1. Licence to Operate (IAS 38 – Intangible Assets)
- The licence has a finite life (10 years) and should be amortized on a straight-line basis.
- Carrying Amount Calculation: Carrying Amount=Cost−Amortization\text{Carrying Amount} = \text{Cost} – \text{Amortization} 200−(200/10)=180200 – (200 / 10) = 180
- Carrying Amount = GH¢180,000
2. Website Development Costs (IAS 38 – Intangible Assets and SIC-32 Interpretation)
- Planning and research costs for websites must be expensed (SIC-32).
- Since the website has not yet been developed, the GH¢20,000 must be expensed and not capitalized.
Carrying Amount = GH¢0
3. Software Costs (IAS 38 – Intangible Assets)
-
Windows Operating System (Perpetual License)
- This is an intangible asset as it provides future economic benefits.
- Carrying Amount = GH¢530,000
-
Microsoft Office (3-Year License)
- This software has a finite useful life (3 years) and should be amortized over its useful life.
- Amortization Calculation: Amortization for 6 months=(243×612)=4\text{Amortization for 6 months} = \left( \frac{24}{3} \times \frac{6}{12} \right) = 4
- Carrying Amount Calculation: 24−4=2024 – 4 = 20
- Carrying Amount = GH¢20,000
4. Induction Training (IAS 38 – Intangible Assets)
- Training costs must be expensed as per IAS 38.69(c).
- Carrying Amount = GH¢0
5. Book Rights (Revaluation Model – IAS 38)
- Dolo LTD follows the revaluation model, and an independent expert has revalued the book rights.
- The new carrying amount should be updated to the revalued amount (GH¢240,000).
- Carrying Amount = GH¢240,000
Summary of Carrying Amount of Intangible Assets as of 31 December 2023
| Intangible Asset | Carrying Amount (GH¢’000) |
|---|---|
| Licence to Operate (Amortized) | 180 |
| Website Development Costs | 0 (Expensed) |
| Windows Operating System (Intangible) | 530 |
| Microsoft Office (Amortized) | 20 |
| Induction Training Costs | 0 (Expensed) |
| Book Rights (Revalued) | 240 |
| Total Intangible Assets | GH¢970,000 |
Final Accounting Treatment:
-
Journal Entries for Amortization:
-
Licence Amortization:
Dr. Amortization Expense GH¢20,000
Cr. Accumulated Amortization GH¢20,000 -
Microsoft Office Amortization:
Dr. Amortization Expense GH¢4,000
Cr. Accumulated Amortization GH¢4,000
-
-
Journal Entry for Revaluation of Book Rights:
Dr. Intangible Assets – Book Rights GH¢150,000
Cr. Revaluation Surplus GH¢150,000
- 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
- Uploader: Salamat Hamid