QUESTION ONE

Aston Ltd acquires new energy efficient technology that will significantly reduce its energy costs
for manufacturing. Costs incurred include:
Cost of new solar technology 1,500,000
Trade discount provided 200,000
Training course for staff in new technology 70,000
Initial testing of new technology 20,000
Losses incurred while other parts of plant shut down
during testing and training. 30,000

Required:

Calculate the cost of intangible assets

Kirk is an incorporated entity. On 31 December, it was successful in a bid to acquire the

exclusive rights to a patent which had been developed by another entity.
The amount payable for the rights was $600,000 immediately and $400,000 in one year's time.
Kirk has incurred legal fees of $87,000 in respect of the bid. Kirk operates in a jurisdiction where
the government charges a flat rate fee (a "stamp duty") of $1,000 for the registration of patent
rights. Kirk's cost of capital is 10%.
Required:
Calculate the cost of the patent rights on initial recognition.
Picard is an incorporated entity. On 31 December it paid $10,000,000 for a 100% interest in
Borg.
At the date of acquisition the net assets of Borg as shown on its statement of financial position
had a fair value of $6,000,000. In addition, Borg also held the following rights:
1. The brand name "Assimilation", a middle-of-the-range fragrance. Borg had been considering
the sale of this brand just prior to its acquisition by Picard. The brand had been valued at
$300,000 by Brand International, a reputable firm of valuation specialists, which had used a
discounted cash flow technique.
2. Sole distribution rights to a product called "Lacutus". It is estimated that the future cash flows
generated by this right will be $250,000 per annum for the next 6 years. Picard has determined
that the appropriate discount rate for this right is 10%. The 6-year, 10% annuity factor is 4.36.
Ignore taxation.
Required:
Calculate goodwill arising on acquisition.

QUESTION TWO

An entity has incurred the following expenditure during the current year:
a) A publishing title acquired as part of a subsidiary company.
b) A licence purchased in order to market a new product
c) TZS100,000 spent on the initial design work of a new product it is anticipated that this
design will be taken forward over the next two-year period to be developed and tested
with a view to production in three years' time.
d) TZS500,000 spent on the testing of a new production system which has been designed
internally and which will be in operation during the following accounting year. This new
system should reduce the costs of production by 20%.
Required:
How should each of these costs be treated in the financial statements of the entity?

QUESTION THREE

An entity has incurred the following expenditure during the current year:
(i)A brand name relating to a specific range of chocolate bars, purchased for TZS200,000. By the
year end, a brand specialist had valued this at TZS 250,000.
(ii)TZS500,000 spent on developing a new line of confectionery, including TZS150,000 spent on
researching the product before management gave approval to fully fund the project.
(iii)Training costs for staff to use a new manufacturing process. The total training costs
amounted to TZS100,000 and staff are expected to remain for an average of 5years.
Required:

Explain the accounting treatment for the above issues.

QUESTION FOUR

a. The objective of IAs 38 – Intangible Assets is to prescribe the accounting treatment for
intangible assets that are not dealt with specifically in another standard. IAs 38 requires an
entity to recognize an intangible asset if, and only if, specified criteria are met. The standard
also specifies how to measure the carrying amount of intangible assets and requires specified
disclosures about intangible assets.

Required:

Describe:

i. What is an Intangible Asset?

ii. When should Intangible Assets be recognized?
iii. on recognition, the basis for the initial measurement of intangible assets. (6 marks)

b. You are a recently qualified second year student working with BECA LTD limited (BECA
LTD) and you report to the financial controller. The main business of the company is to
provide taxi and bus services throughout Ireland. In June 2014, BECA LTD was issued 40
taxi licenses for the dublin area. The national Public Transport Authority (which is
responsible for the regulation of public bus passenger and taxi services) decided in march
2015 to stop issuing new taxi licenses as it was of the opinion that sufficient taxi licenses
have been issued to cope with the public’s taxi requirements.
Initially BECA LTD paid Tshs100,000 for each taxi license. due to the national Public
Transport Authority’s decision, the demand for these licenses increased and in April 2015
taxi licenses are being freely bought and sold by the public on an online regulated taxi
auction website for Tshs500,000 a license. The financial controller of BECA LTD estimates
that the licenses will be worth Tshs1,000,000 each in May 2015. BECA LTD has not
revalued intangible assets in previous years and the company’s year-end is 31 may.

Required:

In planning for the year end accounts process the financial controller has asked you for a memo
which addresses the following:
 i. After initial recognition, on what basis can the taxi licenses be included in the financial
statements for the year ended 31 may 2015?
ii. What are the criteria for revaluation of an intangible asset?
iii. on the basis of the information above and assuming that BECA LTD will adopt a
revaluation policy for intangible assets, calculate the value of the taxi licenses that may
be included in the financial statements for the year ended 31 may 2015 AND show the
accounting double entry required to record this transaction.
c. The national Public Transport Authority recently decided that all current taxi licenses which
previously had an infinite useful life will be valid for only five years, after which they will be
invalid.

Required:

Assuming that BECA LTD had adopted and applied a revaluation policy as per (b) (iii) above,
identify and explain the accounting treatment that is necessary in its financial statements for the
year ended 31 may 2015 in relation to the taxi regulator’s decision AND show the accounting
double entry required to record this transaction at the same date.

QUESTION FIVE

A. IAS 38 Intangible Assets sets out the principles of accounting for the recognition and
measurement of intangible assets. The standard differentiates between intangible assets
acquired individually, those acquired as part of a business combination, and those which are
internally generated. IAS 38 relies on the concept of fair value to measure intangibles, but the
strength of the fair value test varies depending on the objective. Suba Plc (Suba) has entered
into the following transactions during the financial year ended 31 March 2016. The company
seeks to maximize the reported value of its assets wherever possible.

(i) On 1 April 2015, Suba acquired, from a bankrupt competitor, a license to provide radio
broadcast services to a region within Ireland. This license would have been originally issued by
the government for a ten-year period at zero cost, but has a market value due to its exclusivity.
The cost of the license to Suba was Tshs3.3 million, and the remaining useful economic life was
6 years.

(ii) On 1 April 2015, Suba commenced work on developing a new technology to enhance the
quality of the radio broadcasts. It purchased a number of patents at a cost of Tshs2 million and
spent a further Tshs6 million developing the technology, as well as Tshs2 million researching the
international market for the technology in advance of its launch. The directors of Suba were
confident throughout the development process that the technology had massive potential to
generate future economic benefit. On 31 March 2016, this opinion was validated when a rival
broadcaster offered Suba Tshs15 million for its partially developed technology project.

(iii) As a result of Suba’s growing reputation in the broadcasting industry, the directors
commissioned a consulting firm to value its brand name. The brand name has not been
recognized as an asset in the financial statements to date. On 31 March 2016, the consultants
issued a report stating that the fair value of Suba’s brand was Tshs20 million.

(iv) Suba has a portfolio of patents it developed over the past few years. These represent
technologies and processes used in the company’s business to generate economic benefits. The
total carrying value of these patents was Tshs2.8 million at 1 April 2015. They originally had a
15-year useful economic life, but on average seven years remain to their expiry date. The
directors propose, at 31 March 2016, to revalue this portfolio to its estimated fair value of Tshs5
million.

Required:

Discuss the requirements of IAS 38 Intangible Assets with respect to the initial recognition and
measurement of intangible assets acquired:

i. separately for cash,

ii. as part of a business combination, and
iii. internally generated.
B. In each of the scenarios (i) to (iv) above, prepare a briefing not for Suba’s financial controller
advising on the appropriate accounting treatment for the intangible assets for year ended 31
March 2016.