IAS 38 past question papers
All questions on IAS 38 Intangibles which have appeared in ACCA DipIFR from June 2014 have been indexed here. The answers are based on the standards prevalent at the exam point in time.
For the benefit of the readers, we have put the following sequentially to help them understand better
- Question - Relevant portion of the exam pertaining to the standard has been recreated
- Answer - Answers as shared by the ACCA Examination team which was required for the question
- Examiners Feedback - Feedback on answers given by the students for that exam, this is a critical part of learning as students can learn from mistakes which other students did
ACCA Past Papers June 2014 (6 marks)
You are the financial controller of Omega, a listed company which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The year end of Omega is 31 March and its functional currency is the $. Your managing director, who is not an accountant, has recently prepared a list of questions for you concerning current issues relevant to Omega:
You will be aware that we intend to open a new retail store in a new location in the next few weeks. As you know, we have spent a substantial sum on a series of television advertisements to promote this new store. We paid for advertisements costing $800,000 before 31 March 2014. $700,000 of this sum relates to advertisements shown before 31 March 2014 and $100,000 to advertisements shown in April 2014. Since 31 March 2014, we have paid for further advertisements costing $400,000. I was chatting to a colleague over lunch and she told me she thought all these costs should be written off as expenses in the year to 31 March 2014. I don’t want a charge of $1·2 million against my 2014 profits! Surely these costs can be carried forward as intangible assets? After all, our market research indicates that this new store is likely to be highly successful. Please explain and justify the treatment of these costs of $1·2 million in the financial statements for the year ended 31 March 2014.
- Under IAS 38 – Intangible Assets – intangible assets can only be recognised if they are identifiable and have a cost which can be reliably measured.
- These criteria are very difficult to satisfy for internally developed intangibles. For these reasons, IAS 38 specifically prohibits recognising advertising expenditure as an intangible asset.
- The issue of how successful the store is likely to be does not affect this prohibition.
- Therefore your colleague is correct in principle that such costs should be recognised as expenses. However, the costs would be recognised on an accruals basis.
- Therefore, of the advertisements paid for before 31 March 2014, $700,000 would be recognised as an expense and $100,000 as a pre-payment in the year ended 31 March 2014.
- The $400,000 cost of advertisements paid for since 31 March 2014 would be charged as expenses in the year ended 31 March 2015.
ACCA Examiners feedback on the answers given by students
On the whole this part was well answered, with the vast majority of candidates appreciating that IAS 38 – Intangible Assets – effectively prohibits the capitalisation of advertising expenditure as an intangible asset. However, not all candidates appreciated that payments made for television advertisements not yet shown should be treated as pre-payments.
ACCA Past Papers Dec 2016 (5 marks)
You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). You have recently produced the final draft of the
financial statements for the year ended 30 September 2016 and these are due to be published shortly. The managing director, who is not an accountant, reviewed these financial statements and prepared a list of queries arising out of
As you know, in the year to September 2016 we spent considerable sums of money designing a new product. We spent the six months from October 2015 to March 2016 researching into the feasibility of the product. We charged these research costs to profit or loss. From April 2016, we were confident that the product would be commercially successful and we fully committed ourselves to financing its future development. We spent most of the rest of the year developing the product, which we will begin to sell in the next few months. These development costs have been recognised as intangible assets in our statement of financial position. How can this be right when all these research and development costs are design costs? Please justify this with reference to relevant reporting standards.
- Accounting for product design costs is governed by IAS 38 – Intangible Assets.
- Under IAS 38, the treatment of expenditure on intangible items depends on how it arose.
- Generally internal expenditure on intangible items cannot be recognised as assets.
- The exception to the above rule is that once it can be demonstrated that a development project is likely to be technically feasible, commercially viable, overall profitable and can be adequately resourced, then future expenditure on the project can be recognised as an intangible asset. This explains the differing treatment of expenditure up to 31 March 2016 and expenditure after that date.
ACCA Examiners feedback on answers given by students in the exam
Answers were generally answered satisfactorily, with a pleasing level of knowledge being displayed by the majority of candidates.
ACCA Past Papers June 2018 (6 marks)
You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The chief executive officer (CEO) of Omega has reviewed the draft consolidated financial statements of the Omega group and of a number of the key subsidiary companies for the year ended 31 March 2018. None of the subsidiaries are listed entities but all prepare their financial statements in
accordance with IFRS. The CEO has sent you an email with the following queries:
When I read the disclosure note relating to intangible non-current assets in the consolidated financial statements, I notice that this figure includes brand names associated with subsidiaries which we’ve acquired in recent years. However, the brand names which are associated directly with products sold by Omega (the parent entity) are not included within the non-current assets figure. This is another inconsistency that I don’t understand. Please explain how this practice can be in line with IFRS requirements. One final question: would I be right in thinking that, as with property, plant and equipment, we can use the fair value model to measure intangible assets?
Under the provisions of IAS 38 – Intangible Assets – the ability to recognise an intangible asset depends on how the potential asset arose. From the perspective of the Omega group, brand names generated by Omega 1 are internally generated. The recognition criteria for such potential assets are very stringent and only costs generated) associated with the development phase of an identifiable research and development project would satisfy them. This explains why the Omega brand names are not recognised.
In contrast, intangible items which relate to an acquired subsidiary which exist at the date of acquisition are acquired as part of a business combination and for such assets the recognition criteria are different. Provided the fair value of such an intangible can be reliably measured at the date of acquisition, recognised in the consolidated statement of financial position based on its fair value at the date of
acquisition. The use of the fair value model for intangible non-current assets is restricted to those assets which are traded in an active market. This is relatively uncommon in the case of intangibles. It is most unlikely that brand names would be traded in such a market, so the fair value model is unlikely to be available here.
ACCA Examiners Feedback on answers
Answers were generally of a more satisfactory standard.
ACCA Past Papers Dec 2018 (6 marks)
You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS® Standards). The financial statements for the year ended 30 September 2018 are due to be published shortly. A trainee accountant who is assigned to your department is reviewing the financial statements as part of a training exercise. She has prepared a list of queries arising out of this
When I looked at the note detailing the intangible assets we include in our consolidated statement of financial position, I noticed that several brand names associated with subsidiaries we acquired recently were included in this figure.
Therefore I also expected to see a figure for the Omega brand name included within intangible assets. There doesn’t appear to be any amount for the Omega brand name included within intangible assets and I don’t understand why. The
Omega brand name has been developed within Omega for a number of years and is well regarded by our customers. Surely it’s a mistake not to include it as well?
The accounting treatment of intangible assets is regulated by IAS 38 – Intangible Assets. Under IAS 38, the accounting treatment of intangible assets depends on how they arose. The intangible assets of acquired subsidiaries were acquired as a result of a business combination and the initial recognition requirements are contained in IFRS® 3 – Business Combinations. When a new subsidiary is acquired, the purchase consideration needs to be allocated to the identifiable assets and liabilities of the acquired subsidiary.
A brand name (or any other intangible asset for that matter) is regarded as identifiable if it is separable (can be sold without selling the whole business) or arises from contractual or other legal rights (such as legally protecting its use).
Identifiable intangible assets associated with an acquired subsidiary can be recognised separately in the consolidated financial statements provided their fair value can be reliably estimated.
The Omega brand is an internally developed brand. IAS 38 does not allow the recognition of internally developed brands because of the inherent difficulties involved in identifying and measuring them. This explains why the Omega brand is treated differently compared to the brands of acquired subsidiaries.
ACCA Examiners Feedback on answers
Answers to query 2 were generally of a more satisfactory standard. Most candidates were able to appropriately distinguish between the accounting treatment of purchased and internally developed brands. However some marks were lost due to an insufficiently detailed description of the recognition criteria for purchased brands. A number of candidates wasted time by explaining the criteria outlined in IAS 38 – Intangible Assets – for the capitalisation of expenditure on
development projects. The explanations, whilst often being factually correct, were not relevant to the question posed by the trainee accountant.
ACCA Past Papers Dec 2021 (11 marks)
You are the financial controller of Omega, a listed entity with a number of subsidiaries. Your managing director has recently returned from a seminar which discussed a wide range of business issues. Some of these issues related to the preparation of the financial statements. The managing director has prepared a list of questions for you which have arisen as a result of her attendance at the seminar
One of the topics covered during the seminar was a discussion on whether brand names should be included as assets in the financial statements. I looked at our consolidated financial statements and noticed the disclosure note for intangible assets included a separate heading ‘Brands’. The finance director has provided me with an analysis of this figure, and it all relates to brands acquired through the acquisition of subsidiaries. However, the Omega brand name itself was not included at all. Surely this is inconsistent – the Omega brand name is associated with well known and popular products developed by Omega. This brand name is probably as valuable as the brand names associated with the subsidiaries we’ve acquired in recent years. I thought financial statements had to be consistent in their treatment of items. Please explain this apparent inconsistency to me. Please also explain how brand names which are recognised on acquisition are measured and whether they should be amortised.
A brand name is an intangible asset and so the recognition and measurement requirements are to be found in IAS 38 – Intangible Assets.
IAS 38 states that the recognition of brand names (and other intangible assets) in the statement of financial position depends on how they arose. Brand names which are purchased can be recognised as assets.
Where a brand name is purchased in an individual transaction, then the brand name can be recognised at its original purchase cost.
When a parent company acquires a subsidiary company, the purchase consideration needs to be allocated to the individual assets and liabilities which are to be included in the consolidated statement of financial position. Any amount of the consideration which cannot be allocated is presented as goodwill on acquisition.
A brand name acquired as part of the acquisition of a subsidiary can be recognised as an asset in the consolidated financial statements if it is identifiable. This means that the asset is either capable of being sold separately or arises from contractual or other legal rights, regardless of whether or not these rights are transferable. This is even if it is not recognised in the individual financial statements of the subsidiary.
Where a brand name associated with the acquisition of a subsidiary is regarded as identifiable, then it is initially recognised at its fair value at the date of acquisition.
The brand name associated with Omega itself (the parent company) is an internally developed intangible asset from the perspective of Omega.
Unless internally developed intangibles relate to the cost of developing a specific product or process, they cannot be recognised as assets because their ‘cost’ cannot be established reliably. This explains why brand names associated with acquired subsidiaries can be recognised in the consolidated financial statements but the Omega brand name cannot.
Brand names which are recognised should be included as intangible assets and written off (amortised) over their estimated useful lives.
Where the useful lives of brand names are assessed as being indefinite, then no amortisation charge is necessary but the brand name needs to be reviewed for possible impairment at the end of every financial reporting period, irrespective of whether or not indicators of impairment are present.
ACCA Examiners Feedback on answers
Most candidates correctly stated that under the requirements of IAS 38 – Intangible Assets – the ability to recognise an intangible item as an asset depends on how it arose. Most candidates were also able to make the important distinction between purchased and internally developed intangibles. Only a minority of candidates were able to clearly explain that the ability to separately recognise the brand name of a subsidiary in an acquisition situation depends on the ability to separate it from purchased goodwill and measure it appropriately. A number of candidates wasted time by outlining the way in which purchased goodwill is recognised in the consolidated financial statements following the acquisition of the relevant business. Although many candidates were correct in what they had written such statements did not attract marks because they were not answers to the question the managing director was asking. Similarly, whilst it was valid to state that brands acquired in a business combination that can be separated from goodwill are initially measured at fair value, detailed references to the measurement of fair value under the principles of IFRS 13 – Fair Value Measurement – were not required here. As already stated, such references may have been prompted by the fact that IFRS 13 was examined in June 2021 and candidates were expecting to see it appearing again in the December 2021 paper. This cannot automatically be assumed.
ACCA Past Papers Jun 23 (10 marks)
You may be aware that we acquired control of a new subsidiary, Minor, during the year ended 30 June 20X5 and have included its results in the draft consolidated financial statements for the first time. I noticed that various adjustments were made to the figures which were shown in Minor’s own individual financial statements when including them in the consolidated financial statements of Omega.
One example of an adjustment is that development expenditure incurred by Minor, and charged as an expense in Minor’s own financial statements, appears to be treated as an intangible asset in the consolidated financial statements.
When I examine the individual financial statements of Tiny, an unlisted and even smaller subsidiary which was acquired some years ago, it appears that development expenditure is treated as an intangible asset in Tiny’s own financial statements. In this case, no adjustments are necessary in order to include the intangible asset in the consolidated financial statements.
Please explain this apparent inconsistency to me. It would seem to me that all research and development expenditure should be treated as an intangible asset, since it is likely to produce future benefits. Surely development expenditure should be treated consistently in financial statements? Is the different treatment caused by the fact that Minor is a relatively small unlisted company using a simplified version of IFRS standards and are all small companies required to use them?
Accounting for research and development costs under full IFRS is governed by IAS 38 – Intangible Assets. IAS 38 requires that development costs are recognised as an intangible asset once there is a separately defined project, with clearly identifiable expenditure, adequate resources to complete the project, and reasonable certainty that future economic benefits will exceed the capitalised costs. IAS 38 requires research costs to be charged as an expense to profit or loss in all circumstances because at the research stage there is no definite prospect of future benefit for the reporting entity – sense of the point.
In future periods it might be beneficial to require Minor to use full IFRS standards in the preparation of its individual financial statements to make the consolidation process more straightforward as no adjustments would be required.
Test your understanding with our quiz
Sample 5 questions - click here
Full Quiz bank for Students subscribed to the Eduyush DIPIFR Module - click here