Oyarefa Ltd, acquired 80% ordinary shares in Abokobi Ltd on 1 January 2015. The intangible assets of Abokobi Ltd include GH¢9 million of training and marketing expenditure incurred during the year ended 31 December 2016. The Directors of Abokobi Ltd believe that these should be capitalised as they relate to the startup period of a new business venture in Oyibi, and they intend to amortise the balance over the five years commencing 1 January 2017.
On 1 July 2016, Oyarefa Ltd purchased a customer list from the liquidator of a competitor. The price paid was GH¢4 million and was based on the list having a useful life of two years. At 31 December 2016, the Finance Director of Oyarefa Ltd commissioned a report on the value of the customer list from a firm of independent valuers. The firm has valued the customer list at GH¢5 million and estimates a total useful life of five years. The customer list is currently included in intangible assets at a carrying value of GH¢4 million but the Finance Director wants the list to be revalued to the higher amount.
Required:
Recommend the treatment of the above in the consolidated financial statements for Oyarefa Ltd Group for the year ended 31 December 2016 in accordance with IAS 38: Intangible Assets. (6 marks)
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IAS 38 Intangible assets states that start-up, training and promotional costs should all be written off as an expense as incurred as no intangible asset is created that can be recognised (the benefits cannot be sufficiently distinguished from internally generated goodwill, which is not recognised. Abokobi Ltd’s retained earnings will be reduced by GH¢9 million (with result that NCI share of profits are reduced) and the Intangible assets of Abokobi will also be reduced by GH¢9 million.
The customer list would appear to satisfy the requirements of IAS 38, as it is identifiable, non-monetary asset without physical substance. The list is identifiable as it was purchased from a third party. The probability of future economic benefits is always assumed for such a separate acquisition. Oyarefa Ltd has therefore adopted the correct accounting treatment by capitalising the list at its cost of GH¢4 million. However, the list should be amortised over its original useful life of two years. Therefore an amortisation charge of 4/2 x 6/12 = GH¢1.
Revaluation was done at the end of the year so no effect on the current year end.
A journal entry should be put through the books of Oyarefa Ltd
. GH¢ GH¢
DR distribution and administration costs (SPLOCI) 1m
CR intangible assets (SFP) 1m