IAS 38 – Knowsia

FR – L2 – Q33 – Intangible Assets

Explain accounting treatment for R&D, patent, brand, and process in Medina Traders Ltd's 20X4 financial statements per IFRS.

Question

33 AKYEM TRADERS LIMITED

(a) Following are the criteria that should be used while recognizing intangible assets from research and development work.

(i) No intangible asset arising from research shall be recognised.

(ii) An intangible arising from development shall be recognised if, and only if, an entity can demonstrate all of the following:

the technical feasibility of completing the intangible asset so that it will be available for use or sale.
its intention to complete the intangible asset and use or sell it.
its ability to use or sell the intangible asset.
how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
its ability to measure reliably the expenditure attributable to the intangible asset during its development.

(b) (i) Since the product met all the criteria for the development of the product, it should be recognised as an intangible in the statement of financial position (SOFP) of the company. However, RI should capitalise only the development work (i.e. GH¢9 million) as intangible asset. IAS-38 does not allow capitalization of cost relating to the research work, training of staff and cost of trial run.

Since the product has a useful life of 7 years, the amortization expense amounting to GH¢0.32 million (GH¢9 million × 3/12 ÷ 7 years) should be recorded in the statement of profit or loss.

(ii) This purchasing of right to manufacture should be recognised as an intangible in the SOFP because:

it is for an established product which would generate future economic benefits.
cost of the patent can be measured reliably.

Since there is a finite life, the patent must be amortised over its useful life. The useful life will be shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years). The amortization to be recorded in SOCI is GH¢2.83 million (GH¢17 million × 10/12 ÷ 5).

(iii) The acquired brand should be recognised as an intangible in the SOFP because acquisition price is a reliable measure of its value. The amortization to be recorded in SOCI is GH¢0.12 million (GH¢2 million ÷ 10 years × 7/12).

(iv) The carrying amount of the intangible asset should be increased to GH¢10 million in the SOFP. Since there is an indefinite useful life of the intangible assets, it should not be amortised. Instead, RI should test the intangible asset for impairment by comparing its recoverable amount with its carrying amount.

Required

In the light of International Financial Reporting Standards, explain how each of the above transactions should be accounted for in the financial statements of Akyem Traders Limited for the year ended 31 December 20X4

Answer

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Tags: Amortization, Capitalization, Financial Statements, IAS 38, Impairment, Intangible assets, Research and Development
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q32 – Intangible Assets

Explain accounting treatment for intangible asset transactions of Tobi Plc for 20X4 per IFRS.

Question

Tobi Plc entered into the following transactions during the year ended 31 December 20X4. The directors of Tobi Plc wish to capitalise all assets where possible.

(1) On 1 January Tobi Plc acquired the net assets of Gidi for GH¢105,000. The assets acquired had the following book and fair values:

	Book value	Fair value
Goodwill	–	5,000
Patents	5,000	5,000
Non-current assets	50,000	50,000
Other sundry net assets	40,000	40,000

The recoverable amount of the goodwill at 31 December 20X4 was estimated at GH¢2,000.

(2) On 1 April Tobi Plc purchased a patent for GH¢20,000. The patent has a remaining useful life of eight years.

(3) On 1 April Tobi Plc purchased a brand for GH¢50,000. The brand has a remaining useful life of five years.

(4) During the year Tobi Plc incurred expenditure of GH¢30,000 developing a new brand.

(5) During the year Tobi Plc incurred expenditure of GH¢40,000 developing customer lists.

Required
Show how the above transactions would appear in the financial statements (including notes to the financial statements) of Tobi Plc as of 31 December 20X4.

Answer

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Tags: Amortisation, Capitalisation, Financial Statements, Goodwill, IAS 38, Impairment, Intangible assets
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q31 – Intangible Assets

Prepare extracts of financial position and intangible assets note for Cape Coast Pharmaceutical, correcting erroneous write-offs per IAS 38.

Question

Cape Coast Pharmaceutical Limited (CCPL), a listed company, purchased a brand on January 1, 20W9 at a cost of GH¢382 million. It has incurred a substantial amount on further development of the brand in subsequent years.
It is the policy of CCPL to amortise the development expenditures which meet the recognition criteria as given in IAS-38 Intangible Assets, over a period of ten years. The amortisation commences when the development expenditures first meet the recognition criteria. However, it was discovered during the year 20X4 that the development expenditure incurred after acquisition had erroneously been written-off to the statement of profit or loss, details of which, are as follows:

Year ended	GH¢m
December 31, 20X1	24
December 31, 20X2	54
December 31, 20X3	38
December 31, 20X4	43

The draft financial statements (before correction of error) show that retained earnings as at December 31, 20X4 was GH¢1,950 million (20X3: GH¢1,785 million).
Required
In accordance with the requirements of International Financial Reporting Standards, prepare relevant extracts of the Statement of Financial Position along with the note on intangible assets after incorporating the required corrections. (Ignore tax)

Answer

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Tags: Amortisation, Brand Valuation, Financial Statement Correction, IAS 38, Intangible assets, Retained Earnings
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q30 – Intangible Assets

Show how R&D projects are accounted for in Henry Ltd's financial statements for 20X4, including capitalisation and amortisation.

Question

During 20X4 Kofi Ltd has the following research and development projects in progress.

Project A was completed at the end of 20X3. Development expenditure brought forward at the beginning of 20X4 was GH₵412,500 on this project. Savings in production costs arising from this project are first expected to arise in 20X4. In 20X4 savings are expected to be GH₵100,000, followed by savings of GH₵300,000 in 20X5 and GH₵200,000 in 20X6.

Project B commenced on 1 April 20X4. Costs incurred during the year were GH₵56,000. In addition to these costs a machine was purchased on 1 April 20X4 for GH₵30,000 for use on the project. This machine has a useful life of five years. At the end of 20X4 there were still some uncertainties surrounding the completion of the project.

Project C had been started in 20X3. In 20X3 the costs relating to this project of GH₵36,700 had been written off, as at the end of 20X3 there were still some uncertainties surrounding the completion of the project. Those uncertainties have now been resolved and a further GH₵45,000 costs incurred during the year.

Required

Show how the above would appear in the financial statements (including notes to the financial statements) of Kofi Ltd as of 31 December 20X4.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Amortisation, Capitalisation, Financial Statements, IAS 38, Intangible assets, Project Costs, Research and Development
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

Tag (SQ): IAS 38

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FR – L2 – Q33 – Intangible Assets

Explain accounting treatment for R&D, patent, brand, and process in Medina Traders Ltd's 20X4 financial statements per IFRS.

FR – L2 – Q32 – Intangible Assets

Explain accounting treatment for intangible asset transactions of Tobi Plc for 20X4 per IFRS.

FR – L2 – Q31 – Intangible Assets

Prepare extracts of financial position and intangible assets note for Cape Coast Pharmaceutical, correcting erroneous write-offs per IAS 38.

FR – L2 – Q30 – Intangible Assets

Show how R&D projects are accounted for in Henry Ltd's financial statements for 20X4, including capitalisation and amortisation.

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FR – L2 – Q33 – Intangible Assets

Explain accounting treatment for R&D, patent, brand, and process in Medina Traders Ltd's 20X4 financial statements per IFRS.

You're reporting an error for "FR – L2 – Q33 – Intangible Assets"

FR – L2 – Q32 – Intangible Assets

Explain accounting treatment for intangible asset transactions of Tobi Plc for 20X4 per IFRS.

You're reporting an error for "FR – L2 – Q32 – Intangible Assets"

FR – L2 – Q31 – Intangible Assets

Prepare extracts of financial position and intangible assets note for Cape Coast Pharmaceutical, correcting erroneous write-offs per IAS 38.

You're reporting an error for "FR – L2 – Q31 – Intangible Assets"

FR – L2 – Q30 – Intangible Assets

Show how R&D projects are accounted for in Henry Ltd's financial statements for 20X4, including capitalisation and amortisation.

You're reporting an error for "FR – L2 – Q30 – Intangible Assets"

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