CUAC 208 –ILLUSTRATIVE QTNS

QUESTION 1 EXAMPLE - Amortisation of an intangible asset

Figtree Ltd acquired a patent for $200 000, its fair value, with effect from 1 April 2014 with a view to manufacturing Patencas from that date onwards for a period of five years (useful life of the patent). Due to the fact that the production facility was not completed on schedule, production only commenced on 1 July 2014 and continued for a period of 4 years and 9 months from that date. A flood occurred at the beginning of March 2016, and as a result the company was not able to manufacture Patencas during March and April 2016. The residual value of the patent was $Nil at acquisition and it did not change over the next five years, even though it was reviewed at the end of each financial year as is required by IAS 38.

REQUIREDCalculate the amortisation for the patent for the year ended 31 December 2014, 2015 and 2016, taking into account the accounting rules contained in IAS 38.

QUESTION 2

Built It Your Self Ltd (BIYS) is a company that holds various intangible assets as their core business. Information regarding these intangible assets as at 31 December 2014, is as follows:

I On 1 January 2012 patents with a cost of $6 000 000 were purchased. On the date of purchase the useful life of these patents were estimated at 30 years and patents are amortised on a straight-line basis over this useful life, while the residual value is negligible and will remain that way over the total useful life of the patents.

II On 1 July 2014 copyrights on various publications were obtained for an amount of $9 800 000. Legal costs and other professional fees incurred to finalise this transaction amounted to $200 000. On 1 July 2014 it was estimated that the copyrights ought to have a useful life of 20 years and these assets are therefore amortised over this period.

III The patents and copyrights were available for use on their respective dates of acquisition.

Additional information

1. On 1 January 2014 it was established that new legislation was tabled in and accepted by parliament that limits the remaining useful life of the above patents to 16 years. In the light of the above-mentioned, the following information has been obtained:

The patents ought to obtain a price of $4 000 000 on the open market if they are to besold on 31 December 2014. Brokers indicated that they would charge a fee of 2,5% of the selling price to conclude the transaction.

It is expected that patents will generate royalties of $1 100 000 in cash annually, for their remaining useful life. The related costs will amount to approximately $100 000 cash per annum.

An after tax discount rate appropriate to the circumstances would be 14%.

2. The tax effect of the above-mentioned is calculated by applying the ruling tax legislation for tax years commencing before 1 January 2014, but for costs incurred after 29 October 1999. The tax rate has remained at 28% since 2010.

3. The current tax of the company was calculated to be $600 000 before taking into account any of the above. Except for the items resulting from the above, there are no other temporary differences.

4. The deferred tax liability arising from other sources amounted to $1 000 000 both at the beginning and the end of 2014.

5. Assume that all amounts in the question are material and round all amounts to the nearest $1 000.

REQUIRED

Disclose the above information in the financial statements of Built It Your Self Ltd for the year ended 31 December 2014. (35 Marks)

Note A note in respect of the deferred tax liability at reporting date is not required.

Comparative amounts are not required.

An income statement is not required, however, the relevant notes thereto and extracts from the statement of financial position are required.

Notes on the compliance with statements are not required.

QUESTION 3

Dingimuzi Ltd operates from Plumtree border post. The financial director Mr. Matendele approached you for advice regarding the following issues:

ISSUE 1

Dingimuzi Ltd has been in business for a number of years and has established a portfolio of loyal customers. The financial director wants to include this portfolio of customers in the statement of financial position as an intangible asset as he is of the opinion that Dingimuzi Ltd is worth more than what is reflected by the company`s net asset value.

ISSUE 2

There has been an increase in violence and rape against women and children in the border post due to an influx of border jumpers. Market research has indicated that there is need for a shocking device that can be used for self- defence by the affected group. Two prototypes were developed during the year at a cost of $21 000. A final choice between the two prototypes will be made early in the next financial year. The financial director wants to capitalise the $21 000 as an asset.

ISSUE 3

The company spent $25 000 during the year to generate a trademark internally. It is expected that the benefits from the trademark will flow to the entity over a period of 10 years. The company therefore wants to capitalise the trademark and amortise it over 10 years.

ISSUE 4

Early in the year a new production process was brought into use. Personnel were trained for 3 months to operate the new system. The total training expenditure amounted to $22 000. The new system will be in use for at least 8 years, and therefore the company wants the training expenditure and amortise it over 8 years.

ISSUE 5

Dingimuzi Ltd embarked on a massive marketing programme during the year and incurred advertising costs amounting to $25 000 in- respect of television advertisements. The objective of these advertisements was to introduce to the public two new products of Dingimuzi Ltd. It is expected that the demand for these products will last for approximately 5 years. As the economic benefits will flow to the entity over a five-year period, the financial director wants to capitalise the advertising costs and then amortise them over five years.

Required:

Indicate in each of the above issues whether or not the relevant costs may be capitalised. Motivate your answer in accordance with International Financial Reporting Standards (IFRS). Assume all amounts to be material.

The following question has been included to provide guidance on the approach to be followed when answering a comprehensive intangible asset question (specifically research and development costs).

QUESTION 4 (30 marks - 45 minutes)

Newtec Ltd, a company listed on the Johannesburg Securities Exchange, is continuously engaged with research, development, production and marketing of new products for the African market.

The projects Newtec Ltd are currently engaged in are as follows:

(a) Newtec Ltd is constantly busy identifying possible new projects for research and development. Only 3% of these possibilities are submitted annually for further research. During 2014 the cost associated with these investigations amounted to $18 000.

(b) Project Ampada is in the final stage of the research process. The project manager is very

optimistic that a breakthrough will soon be made and is convinced that the project will be developed up to the production stage. The cost of the project amounted to $17 700 for 2014.The cumulative costs to date for this project amount to $26 400.

(c) Two projects, Newa and Neartha, are currently under development. Newa is in an early stage of development and the economical viability is still unsure. Neartha is in an advanced stage of development and according to the project manager Neartha satisfies all the criteria for asset recognition. The development costs incurred for Newa and Neartha for 2014 amounted to $9 000 and $14 400 respectively. The necessary calculations for impairment have been performed and no impairment losses were evident. Impairment tests were performed on 31 December 2014 and there were no indications of impairment.

(d) Project Klada is in its final stage of development. Newtec Ltd plans to start with the production of Klada not later than 15 January 20.5. The official launch of the product is scheduled for 10 February 2015. A huge marketing campaign (with an estimated total cost of $30 000), to promote the Klada product, was launched on 1 December 2014. At 31 December 2014 $18 500 had been expended on the above-mentioned campaign, while most of the benefits to be derived from it will only be realised in 2015.

The development costs incurred during 2014 in respect of Klada, excluding the above mentioned expenses, amounted to $11 000. Capitalised development costs on Klada in the years prior to 2014 amounted to $14 000. Impairment tests performed at the end of the current and previous years reflected no indications of impairment.

(e) The production and marketing of product Omega commenced on 1 January 2013. The gross profit of Omega amounted to $57 000 for the year ended 31 December 2014. This profit was unchanged per unit. At 31 December 2012 development on Omega was completed and the maximum amount of $300 000 was capitalised as an asset. The initial estimate indicated that 500 000 units could be sold evenly over a period of five years before the product became obsolete. The actual units sold were 100 000 during 2013 and 95 000 during 2014. On 31 December 2014 it was estimated that only 90 000 units per annum could be sold for another three years. The accountant of Newtec Ltd estimated that the present value of the net cash inflows associated exclusively with the capitalised development costs, amounted to $162 000. The development costs cannot be sold on its own.

(f) Newtec has an Alfa machine which is utilised mainly for production and tests in the research and development department. The cost of Alfa amounted to $35 000 in December 2011. Accumulated depreciation on 31 December 2013 amounted to $14 000 and depreciation for 2014 amounted to $7 000, allocated as follows:

$

Ampada 2 500Newa 700Neartha 1 300Klada 1 400General production 1 100

7 000

The above-mentioned depreciation is not included in the costs and expenses for the current year as stated in (a) to (e) above. Machine Beta is utilised in the commercial production department of Newtec Ltd. Beta was available for use on 1 January 2011 and had a cost of $55 000. Newtec Ltd depreciates machinery at 20% per annum on a straight-line basis. The profit before tax for 2014 of Newtec Ltd, before taking any of the above-mentioned items into account, amounted to $250 000. All costs related to research and development activities that are recognised in profit or loss are included in the income statement under the line item “other expenses”.

Ignore taxation and comparative amounts.

Assume that intangible assets recognised are accounted for using the cost model and that they have finite useful lives.

REQUIRED

(a) Disclose the above-mentioned information in the following notes to the financial statements of Newtec Ltd for the year ended 31 December 2014: (25 Marks)

1. Accounting policy;2. Profit before tax; 3. Property, plant and equipment;4. Internally generated intangible assets.

(b) Calculate the profit before tax as it would be disclosed in the income statement of Newtec Ltd for the year ended 31 December 2014. (5 Marks)