- 20 Marks
Question
Solonlair is a Ghana based manufacturer and retailer of ice cream and frozen dairy products. The company had a licence valued at GH¢4 million in its draft statement of financial position as at 30 June 2025. The licence was purchased on 1 July 2022 for GH¢10 million and was valid for five years. Amortisation has been charged for each full year to 30 June 2025 (through cost of sales). A clause in the contract allows the licensor to withdraw the licence (with no compensation) if certain financial health measures are not maintained to protect its own brand.
Despite the refinancing, Solonlair failed these measures in the first half of 2025 and the licensor notified Solonlair in May 2025 that it would indeed withdraw the licence, effective 1 July 2025. For tax purposes, allowances for the cost of the licence are allowed on a straight line basis over the five-year period of the licence. The tax allowances for the cost of the licence are unaffected by the withdrawal of the licence.
Required:
Explain the financial reporting treatment of the above transaction in the books of Solonlair for the year ended 30 June 2025. (4 marks)
Answer
(A) Licence
The licence has a zero recoverable amount at 30 June 2025 and should be written off.
| GH¢’000 | GH¢’000 | |
|---|---|---|
| DR Profit or loss | 4,000 | |
| CR Licence | 4,000 |
(B) Inventories
| GH¢’000 | GH¢’000 | |
|---|---|---|
| Cost | 2,200 | |
| Net realisable value | 0 | |
| Loss | 2,200 |
| GH¢’000 | GH¢’000 | |
|---|---|---|
| DR Cost of sales | 2,200 | |
| CR Inventories | 2,200 |
The cost of disposal and re-use will be accounted for when it is incurred. A net realisable value cannot be negative.
(C) Any amount recorded at the present value of future cash flows should be adjusted as time passes. The adjustment allows for the fact that the time to maturity is shorter.
The adjustment is measured as the opening balance multiplied by the original discount rate. Another method, which would give the same answer, would be to recalculate the discounted amount using the same discount rate but the shorter period.
Here GH¢14 million X 8% gives GH¢1.12 million.
This is charged (debited) to profit or loss (finance costs) and increases the present value of the provision (credit entry).
(D)i) The exclusive distribution right is a form of intangible asset. Tarnue should capitalize it and amortise it over its useful life of 3 years.
ii) The Tarnue 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. Clearly every brand is unique, so there cannot, by definition, be an active market in identical assets. Similar, maybe, but identical, no. The other exception to the non-recognition rule is the instance of development costs. 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) This expenditure falls into the category of market research. IAS 38 specifically precludes the capitalisation of market research. Hence the GH¢500,000 must be expensed as incurred.
(E) Functional currency is the currency of the primary economic environment in which the entity operates whereas presentation currency is the currency in which financial statements are presented.
- Tags: Foreign Exchange, Functional Currency, IAS 21, Presentation Currency
- Level: Level 2
- Topic: International Financial Reporting Standards (IFRS)
- Series: NOV 2025
- Uploader: Samuel Duah