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IAS 38 Intangible Assets
Home Level 2 2.1 Financial Reporting Archive by Category "IAS 38 Intangible Assets"

Category: IAS 38 Intangible Assets

2.1 Financial ReportingIAS 38 Intangible AssetsLevel 2

May 2021 Q5 c.

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

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2.1 Financial ReportingIAS 38 Intangible AssetsLevel 2

May 2018 Q2 d.

Delali Ltd adopts revaluation model for subsequent measurement of its intangible assets in accordance with IAS 38: Intangible assets. The policy of Delali is to revalue its intangible asset at the end of each year. An intangible asset with an estimated useful life of 9 years was acquired on 1 January 2016 for GH¢45,000. It was revalued to GH¢54,400 on 31 December 2016 and the revaluation surplus was correctly recognized on that date. As at 31 December 2017, the asset was revalued at GH¢32,000.
Required:
Discuss the accounting treatment required in 2016 and 2017 financial statements.                                                           (4 marks)

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In 2016

  • The income statement for 2016 shows an amortization of GH₵5,000 [GH₵45,000/9years]
  • The statement of financial position as at 31 December 2016 shows the following
  • The asset at a carrying amount of GH₵54,400 [under non-current assets]
  • A revaluation surplus of GH₵14,400 [GH₵54,400 – GH₵40,000] is shown under equity.

In 2017

  • Amortisation of GH₵6,800 [GH₵54,400/8 years (remaining useful life)] is charged to income statement.
  • A transfer should be made from revaluation surplus to retained earnings through the statement of changes in equity of the excess depreciation of GH₵1,800 [6,800 charged less 5,000 (45,000/9) based on the original cost], and thereby reducing
    the revaluation surplus to GH₵12,600.
  • The carrying amount of the intangible asset as at 31 December 2017 is now GH₵47,600 [GH₵54,400 – GH₵6,800] but this should be reduced to GH₵32,000.
  • The revaluation deficit is GH₵15,600 of which GH₵12,600 should be recognized in other comprehensive [reducing the revaluation surplus to nil and the GH₵3,000 remainder is recognized as an expense in the income statement).

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2.1 Financial ReportingIAS 38 Intangible AssetsLevel 2

May 2016 Q3 c.

You are the finance director of ABC Company. ABC is preparing its financial statements for the year ended 31st December 2015. The following item has been brought to your attention:
ABC acquired the entire share capital of XYZ Ltd during the year. The acquisition was achieved through a share exchange. The terms of the exchange were based on the relative values of the two companies obtained by capitalizing the companies’ estimated cash flows. When the fair value of XYZ’s Ltd identifiable net assets was deducted from the value of the company as a whole, its goodwill was calculated at GH¢2.5 million. A similar exercise valued the goodwill of ABC at GH¢4 million. The directors wish to incorporate both goodwill values in the companies’ consolidated financial statements
Required:
Describe how ABC should treat the item in its financial statements for the year ended 31st December 2015 commenting on the directors views, where appropriate.                                                                                                                                    (5 marks)

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Whilst it is acceptable to value the goodwill of GHC2.5 million of XYZ (the subsidiary) on the basis described in the question and include it in the consolidated balance sheet, the same treatment cannot be afforded to ABC’s own goodwill. The calculation may indeed give a realistic value of GHC4 million for ABC goodwill, and there may be no difference in nature between the goodwill of the two companies, but it must be realized that the goodwill of ABC is internal goodwill and IFRSs prohibit such goodwill appearing in the financial statements. The main basis of this conclusion is one of reliable measurement. The value of acquired (purchased) goodwill can be evidenced by the method described in the question (there are also other acceptable methods), but this method of valuation is not acceptable as a basis for recognizing internal goodwill.

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