IAS 38 Question 5

QUESTION 5: IAS 38 INTANGIBLE ASSETS

Zouq Inc. is a multinational company. As part of its vision to expand its business in South Asia, it
purchased a 90% share of a locally incorporated company, Momin Limited. Following are the brief
details of the acquisition:

Date of acquisition January 1, 2014

Total paid up capital of Momin Limited ($10 each) 500,000,000
Purchase price per share $30
Net assets of Momin Limited (as per 2013 audited financial statements) 650,000,000
Fair value of net assets (other than intangible assets) of Momin Limited 1,100,000,000

Momin Limited has an established line of products under the brand name of “Badar”. On behalf of
Zouq Inc., a firm of specialists has valued the brand name at $100 million with an estimated useful
life of 10 years at January 1, 2014. It is expected that the benefits will be spread equally over the
brand’s useful life.

An impairment test of goodwill and brand was carried out on December 31, 2014 which indicated
an impairment of $50 million in the value of goodwill. An impairment test carried out on December
31, 2015 indicated a decrease of $13.5 million in the carrying value of the brand.

Required:
(a) What are the requirements of International Accounting Standards relating to amortization of
intangible assets having finite life?
(b) Prepare the ledger accounts for goodwill and the brand, showing initial recognition and all
subsequent adjustments.

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IAS 38 Question 5

ANSWER – QUESTION 5: IAS 38 INTANGIBLE ASSETS

Part (a)
(i) The depreciable amount of an intangible asset with a finite useful life shall be allocated on a
systematic basis over its useful life.
(ii) Amortization shall begin when the asset is available for use
(iii) Amortization shall cease at the earlier of the date that the asset is classified as held for sale
and the date that the asset is derecognized.
(iv) The amortization method used shall reflect the pattern in which the asset's future economic
benefits are expected to be consumed by the entity.
(v) The amortization charge for each period shall be recognized in statement of profit or loss.

Part (b)
Goodwill Account
01.01.14 Goodwill initial W1 270,000,000 31.12.14 Impairment loss 50,000,000
31.12.14 c/d 220,000,000
270,000,000 270,000,000
01.01.15 b/d 220,000,000 31.12.15 c/d 220,000,000
220,000,000 220,000,000

Brand Account
01.01.14 Brand recognized 100,000,000 31.12.14 Amortization 10,000,000
31.12.14 c/d 90,000,000
100,000,000 100,000,000
01.01.15 b/d 90,000,000 31.12.15 Amortization 10,000,000
31.12.15 Impairment of brand 13,500,000
31.12.15 c/d 66,500,000
90,000,000 90,000,000

W1 – value of goodwill:
Purchase price (50,000,000 x $30 x 90%) 1,350,000,000
Less: Fair value of net identifiable assets and liabilities (1,100,000,000 x 90%) (990,000,000)
Less: Value of brand (100,000,000 x 90%) (90,000,000)
Goodwill recognized 270,000,000

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