ACCA DipIFR question papers and answers on IAS 38 from June 2014

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ACCA DipIFR question papers and answers on IAS 38 from June 2014

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

Question

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.

Answer

  • 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.

 

Question

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
the review.

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.

Answer

  • 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.

Question

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?

Answer

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. 

Question

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
review.

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?

Answer

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.

 

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