MFRS138-SS - mfrs 138 PDF

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Suggested Solution MFRS 138: Intangible AssetsQuestion 11. MFRS 138 Intangible Assets prohibits the internally generated goodwill to be recognized as an asset. Explain why? Internally generated goodwill cannot be recognised as an intangible asset because it is not an identifiable resources controlle...

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Suggested Solution MFRS 138: Intangible Assets Question 1 1.

MFRS 138 Intangible Assets prohibits the internally generated goodwill to be recognized as an asset. Explain why? Internally generated goodwill cannot be recognised as an intangible asset because it is not an identifiable resources controlled by the entity. The cost also cannot be measured reliably

2.

Farey Bhd developed its own customer lists and incurred a cost of RM 100,000. It expect the sales to increase and the list will be updated every three years. In order to widen its target market and probable increase in profitability, Farey Bhd also acquired a customer lists for RM400,000. It expects to derive benefits from it for 2 years. The internally generated customer list cannot be recognised as intangible assets as the cost cannot be distinguished from the cost of developing the business as a whole. However, the acquired customer list can be recognised as intangible assets as it meet the definition together with all the characteristics of identifiability, control and future economic benefits. It also meets the recognition criteria for capitalisation. Hence, the customer list will be measured initially at RM400,000 and to be amortised over its useful life of 2 years.

3.

Fabel Bhd send some of its staff for training and incurred a cost of RM100,000. The expected benefits derived from the training should last four years. Fabel Bhd decided to treat the training cost as an intangible asset and amortised it over four years. Asset can be recognised as intangible only if meets the definition, characteristics (identifiability, control and future eco benefits) and the recognition criteria for capitalisation. Although training may improve skills of the staff and expected to bring future eco benefits, the training cost cannot be recognised as intangible as there is no control over staff - can leave and take the skill with them

4.

Cahaya Budi Bhd has a patent on a copier design. The patent has been amortised on a straight-line basis since it was first acquired at a cost of RM680,000 in 2004. During 2007, it was decided that the benefits from the patent would be experienced over a total of 10 years rather than the 17-year legal life now being used to amortise it. For the year ended 31 December 2007, there is a change in estimated useful life from 17 years to 10 years. This is known as change in accounting estimate. New amortisation will be charged based on the last CA over its new estimated useful life of 10 years. The CA at that time was RM520,000[680,000-(680,000/17x4). Hence, the new amortisation charged will be RM520,000/6, i.e. RM86,667.

Question 2. C. Putra Bhd a. Project Blush Since the competitors are gaining ground from the project, the ability to sell the project is now in doubt. The project is no longer meeting the capitalisation criteria√. Therefore the total development cost of RM325,000 (RM275,000+RM50,000) will be written off to Income Statement√. (2 marks) Project Pure The development of RM100,000 that was recognized as expense in 2009 cannot√ be reinstated as it did not meet the capitalization criteria. However, the amount RM500,000 will be capitalized√ in 2010 as the project will give future economic benefit to the company. 1

(2 marks) Patent The cost of RM250,000 is recognized as intangible asset√. Since the patent has an indefinite useful life, the cost will not be amortised√ but will be assessed for impairment and the useful life will be reviewed annually. (2 marks) b. Bal b/d Incurred during the year Write off to IS Carrying amount

Project Blush RM 275,000√ 50,000√ (325,000)√ 0√

Project Pure RM

Patent RM

500,000√

250,000√

500,000√

250,000√ (8 X ½ = 4 marks)

QUESTION 3 a.

The license acquired is a resource controlled by Emas Alex Bhd as a result of past events and from which future economic benefits are expected to flow to the entity. // The license is classified in accordance to MFRS 138 Intangible assets that is an identifiable non-monetary asset without physical substance; along with control and future economic benefit criteria./// (5 / = 5 marks)

b.

As for the incurrence of restoration expense and also the incurrence of compensation expense, the treatment will be in accordance to Para 14 MFRS 137 A provision shall be recognised when: (a) an entity has a present obligation (legal or constructive) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision shall be recognised. There will be ‘provision for restoration’ and ‘provision for compensation’. (5 marks)

c.

31 December 2013

d.

Dr

Amortisation expense Cr Accum. Amortization/License (7,000,000/10)

/ /

Dr

Interest expense Cr Provision for restoration [7% of (1,100,000 + 77,000)]

/ /

Dr

Compensation expense Cr Provision for compensation

/ /

700,000 700,000 82,390

82,390

/

//

270,000 / 270,000 (10 / @ ½ = 5 marks) If the payment of RM270,000 has been made to the three workers, Emas Alex Bhd should be able to recover the amount of the compensation from the insurance company. // 2

The recovery from the insurance company can be recognised as Contingent Asset (in accordance to MFRS 137). // However, since no payment made yet, the recovery should not be recognised as an asset. / (5 marks) (Total: 20 marks) Question 4 Accounting treatment for each of the transactions for the year ended 31 December 2012 1.

The customer’s list should be recognised as intangible assets as it meets the definition with all the characteristics of identifiability, control and future economic benefit. It also meets the recognition criteria for capitalisation (probable that future economic benefit will flow to the entity and cost can be measured reliably). The customer list will be measured initially at cost, i.e. purchase price of RM100,000. Since it has a finite useful life, the asset should be amortised over its useful life of 5 years amounted to RM20,000. The amortization should begin when the customer’s list is available for use i.e. 1 January 2012.

2.

On 31 December 2012, goodwill of RM10mil should not be recognised as intangible asset as it is internally generated goodwill. It is not an identifiable resource controlled by the entity & cannot be measured reliably at cost .

3.

Convenience store franchise can be recognised as intangible asset as it meets the definition with all the characteristics of identifiability, control and future economic benefit. It also meets the recognition criteria for capitalisation (probable that future economic benefit will flow to the entity and cost can be measured reliably). As it can operates for indefinite period (indefinite useful life), the intangible asset should not be amortised but assessed for impairment annually or whenever there is an indication of impairment.

Question 5 i. Determine the impairment loss (if any) of the brand. To determine whether there is impairment loss or not to be recorded, impairment test should be conducted by comparing the asset’s carrying amount with its recoverable amount. As at 1 July 2011, CA of the brand was RM7.5 million [10mil - (10mil/10x2.5)] while RA was RM5mil, i.e. the higher between the asset’s FVLCTS of RM5mil and its VIU of RM4 mil. As CA exceed its RA, the brand will be written down to RM5mil and there will be an impairment loss of RM2.5mil (7.5mil-5mil) ii.

Calculate the amortisation expenses for the year ended 31 December 2011. Amortisation expense: 1/1/2011 to 30/6/2011 10M/10 X 6/12 = 1/7/2011 to 31/12/2011 5M/4 X 6/12 =

iii.

RM 500,000 625,000 1,125,000

Prepare relevant journal entries for the above transactions for the year ended 31 December 2011. 31 December 2011: Debit (RM)

3

Credit (RM)

1. 2.

Dr SOPL - impairment loss Cr Acc impairment loss Dr SOPL - amortisation expense Cr Acc amortisation expense

2,500,000

2,500,000

1,125,000 1,125,000

QUESTION 6 a.

The trademark is an intangible asset, a non-monetary asset without physical substance. √√ It also meets the definition as per MFRS 138 as follows: o Identifiability, it is separable and can be sold individually √ o Control, the entity has control of it √ o Future economic benefits are expected to flow to the entity resulting from its use √ (5√ = 5 marks)

b.

The trademark’s measurement at initial recognition will be the purchase cost √ incurred at RM1,000,000,000. √ From the date of acquisition, no amortisation needs to be provided √ as the trademark can generate a net cash flow for an indefinite period √. Therefore, the measurement after its initial recognition will be the same √ as initial measurement of RM1,000,000,000. (5√ = 5 marks)

c.

The appropriate accounting treatment relating to the trademark on 1 May 2013: The carrying amount RM1,000,000,000 on 1 May 2013 will be compared with present value of RM600,000,000. √ The trademark need to be recorded at the recoverable amount of RM600,000,000 which is lower than the carrying amount. √ The difference of RM400,000,000 √ is recognised as an impairment loss √ and will be charged to statement of profit or loss, √ (5√ = 5 marks)

d.

The subsequent measurement of the trademark for the year ended 30 June 2014: RM’000 Recoverable amount on 1 May 2013 √ 600,000 Less: Amortisation expense as at 30 June 2013 (RM600,000,000/4 yrs x 2/12) √√ (25,000) Less: Amortisation expense as at 30 June 2014 (RM600,000,000/4 yrs) √√ (150,000) 425,000 (5√ = 5 marks) (Total: 20 marks)

Question 7 A. i Identifiable ii. Control iii. Probable Future Economic benefits iv. Cost can be measured reliably B.

a.

(4 x ½ = 2 marks)

No, cannot be capitalized. It has to be written off to income statement as MFRS 138 does not recognize internally generated goodwill to be capitalized.√√ (2 marks) 4

b.

The franchise can be capitalized as it is acquired by Bizarro RM500,000. Since it is indefinite, no amortisation but impairment test need to be done every year end.√√ (2 marks)

C. 31.12.2013 Dr Deferred development expenditure √ Cr Cash √ - Salaries and wages for engineers. - Renting of special equipment - Material consumed - Registration of legal right fees Prov for Depre on machineries 31.12.2014 Dr Amortisation of Dev Expenditure/ ISOCI√ Cr Provision for amortization√ D.

√1,130,000 √700,000 √50,000 √150,000 √80,000 √150,000 √113,000 √113,000 (12√ x 1/2 = 6 marks)

a. Costs incurred in 2013 are expense off in SOCI as it is still under research stage and does not show any hint of being developed or economic benefit.√ Thus, it does not fulfill the recognition criteria for intangible asset. Expenses of RM45,000 will be expensed off. √ In 2014, the project satisfies the requirement for capitalising development expenditure, the company has confidence about the development of the herbs tea.√ Thus, thiswill bring future economic benefit. Expenses of RM1,950,000 will be capitalised.√ (4 marks) b. 31.12.2013 Dr SOCI√ Cr Cash or Payable√

√45,000 √45,000

31.12.2014 Dr Intangible Asset-R&D √ Cr Cash or Payable Cr Accumulated depreciation Workings: Costs Market research costs Survey costs Overhead Total

RM 30,000 10,000 5,000 45,000

Question 8 5

√1,950,000 √ 1,700,000 √ 250,000 (8 √ X ½ = 4 marks)

a. Even though there is no legal obligation, but there is a constructive obligation / to restore the riverbed, therefore should made a provision of RM4 million / License should be recognized as an intangible asset / of RM10 million and amortized over 5 years / at RM2 million per annum (4 marks) b. i. Based on FRS 138 Intangible Assets, an asset can be recognized as an intangible asset if it has the following qualities ,i.e identifiability, control and future economic benefit. / Even though training can improve the skills of the staff and expected to bring in future economic benefit , training costs cannot be recognized as an intangible assets/ because there is no control /over the staff, for example the staff can leave the company and take the skills with them. ii. Research cost should not be recognized as an intangible asset but need to be charged as an expenses / in the period they are incurred because there is no probability that the future economic benefit will flow to the entity. / (5 marks) c. i. Brand Cost Acc. Amortization (10M/10 X 2.5) Carrying amount Recoverable amount (higher of VIU RM 4M and FV less cost to sell RM 5M) / Impairment loss (CA > RA)

RM ‘ million 10 / (2.5) // 7.5 5/ 2.5 / (6 x ½ = 3 marks)

ii. Amortization . RM 1/1/2011 – 30/6/2011 10M/10 X 6/12 = 500,000 // 1/7/2011 - 31/12/2011 5M/4 X 6/12 = 625,000 // 1,125,000 (4 X ½ = 2 marks)

iv.

Limitation to reversal of impairment loss is up to the carrying amount as if there is no impairment / and reversal of impairment loss is credited to SOCI / .

(2 X 1 = 2 marks)

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