Sawla Ltd (Sawla) prepares financial statements under International Financial Reporting Standards (IFRSs). On 1 June 2020, Sawla acquired a manufacturing software at the cost of GH¢1.5 million. The software is estimated to have a useful economic life of 5 years with no residual value. To develop staff capacity to a higher level, a training program was organised for production staff on the use of the software at a cost of GH¢250,000 during the year. Management is convinced the staff training will generate more revenue for the entity through future economic benefits. Sawla intends to adopt the revaluation model under IAS 38 Intangible Assets and to revalue the software at the end of each year. Accordingly, the software was valued by a software engineer at GH¢1.7 million on 31 December 2020. Sawla accepted this value and decided to incorporate the valuation in the financial statements.
Required:
In accordance with IAS 38: Intangible Assets, explain how to account for the above transactions for the year to 31 December 2020. (5 marks)
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Sawla to recognise an intangible asset at the cost of GH¢1.5million.
Training cost cannot be capitalised under IAS 38 Intangible assets. Hence the cost of training GH¢250,000 should be expensed to the statement of profit or loss for the year.
The fair value must be determined by reference to an active market. If no such need exists for the intangible asset, then the cost model must be adopted. The valuation of GH¢1.7 million cannot be incorporated because it is not obtained from an active market.
On 31 December 2020, the Intangible asset will be measured at GH¢1.325 million [(1.5 million – (GH¢1.5 million ÷ 5years x 7/12)].
The Amortisation charge of GH¢175,000 should be recognised in the statement of profit or loss.
Initial recognition 1 mark
Training cost write off 1 mark
Application of fair valuation model 2 mark
Treatment of amortisation 1 mark