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Financial Accounting: GAAP Principles 3e

Tutorial 6.1
(Solution included in
SQB)
1.
2.

3.
4.
5.
6.
7.

Principles of recognising
intangible assets

Chapter 6

Basic level

When is it permissible to capitalise an internally generated intangible asset?


During the current year Brands Galore Ltd capitalised a brand it purchased for
R350 000. Acting on behalf of Brands Galore Ltd, a firm of specialists reliably
determined the fair value of the brand to be R370 000 at the end of the current financial
year. Explain briefly whether or not the directors may revalue the brand to R370 000.
Explain whether or not you would be able to revalue a broadcasting licence that you
have capitalised.
What is the rationale for not recognising advertising as an asset?
Explain the difference between goodwill and other intangibles.
List two aspects that you will consider when determining the useful life of an intangible
asset.
Explain how you would determine the residual value of an intangible asset.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 6.2

Intangible asset recognition


and disclosure

Chapter 6

Basic level

Kimberley Ltd sells various products. They have achieved major success since designing a
new machine for the sorting of one of the major products.
The machine parts, labour and sundry costs incurred to build and install the machine
amounted to R1 560 000. As the new machine resulted in such a huge increase in revenue,
Kimberley Ltd decided to patent the design, so that no-one else could replicate it. The cost of
the patent was R150 000, excluding R50 000 paid to the attorneys for legal fees and
registration of the patent.
The machine was completed on 1 February 20x7 and brought into use on 1 April 20x7. The
patent was registered on 1 May 20x7. The company has a 31 December financial year-end.
Required:
1.
2.

Define an intangible asset.


Discuss how the patent should be recognised in the financial statements of Kimberley
Ltd at 31 December 20x7. Justify your answer with concepts from the Framework and
any other relevant IFRS.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 6.3

Research and development


costs

Chapter 6

Intermediate

Ingenious (Pty) Ltd (Ingenious) is a company that specialises in researching original ideas,
developing the engineering plans required, patenting these ideas, and then selling the rights
to produce their products to interested parties.
During the year ended 30 April 20x9, Ingenious was involved with a new project which had
the following details.
On 14 April 20x8 one of their research scientists came to work with the idea that when
painting a house, you should be able to paint a template, which could be stuck onto the wall
and thereby transfer the paint to the wall.
The research team began investigating this idea, and by 31 May they had a full research
report which was presented to the head of the research department. Total costs incurred up
to 31 May amounted to R30 000. They were given the go-ahead to begin work on a
prototype, and were instructed also to do a feasibility study and market research into the
future benefits of the project.
The research team began immediately with the prototype, but in their excitement they did not
conduct the market research and feasibility study. The total costs incurred on the prototype
amounted to R75 000.
On 31 December 20x8, the fully functioning prototype and engineering designs were
delivered to the head of the department, and after inspecting these, the company applied to
register the patent on 15 January. The cost of registering the patent amounted to R100 000,
and in addition there were legal fees of R15 000. The patent has a useful life of 10 years.
On 28 February 20x9, a deal was struck with Paint Emporium (Pty) Ltd, whereby Paint
Emporium would have access to the engineering designs for a period of three years, with an
option of renewing the contract.
Required:
Discuss the appropriate accounting treatment of the research and development costs and
the patent for the year ended 30 April 20x9.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 6.4

Recognising an intangible
asset

Chapter 6

Intermediate

Radio1 Ltd an established music radio station, acquired a new broadcasting licence on
1 January 20x4 in terms of a licensing agreement with the state broadcasting authority,
which would enable the company to launch a new music station. The licence cost R12 million
on 1 January 20x4 and could be renewed every four years, indefinitely, at a cost of R2 500
for each renewal.
Radio1 Ltd intends to renew the broadcasting licence indefinitely as it has done with its other
broadcasting licences. The company has been in operation for 60 years, is well established,
and is in a strong financial position. Based on budgets, Radio1 Ltd expects that the new
music station will be very successful and that significant advertising revenues will be
generated from the new station. It is not anticipated that the technology used in broadcasting
radio will change in the foreseeable future.
Radio1 Ltd has never had a problem renewing its other broadcasting licences with the
broadcasting authority.
The terms of the broadcasting licence were as follows:

The licence could be renewed indefinitely at the end of each four-year period
commencing 31 December 20x7, at a cost of R2 500 per renewal.
The broadcasting licence could not be sold or transferred to another party.
The broadcasting authority had the right to decide whether to renew the licence at
each licence renewal date.
If the broadcasting authority did not intend to renew the licence, it had to give the
company 24 months notice before terminating the licence.

There is no active market for broadcasting licences within South Africa.


Required:
Discuss fully the appropriate recognition and measurement of the broadcasting licence in
the statement of comprehensive income and the statement of financial position of Radio1
Ltd, in terms of the Framework and current International Financial Reporting Standards.
Your answer should include a discussion of the accounting treatment on initial recognition,
subsequent measurement, and the expenditure to renew the licence.
Ignore all tax implications (including VAT).

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 6.5

Intangible assets:
amortisation & impairment

Chapter 6

Advance level

1. Bolting Ltd is creating a new computer software program. At 30 June 20x10, the program
is not yet complete, but owing to the speed of technological advances has an expected
remaining useful life of three years. They have incurred the following costs up to yearend:
R25 000 in researching whether consumers will purchase the
product
R60 000 in developing the program*
R20 000 in developing the anti-hacking protocols
*

Date costs incurred


Aug 20x9
1 Nov 20x9 to
28 Feb 20x10
Dec 20x9

Incurred double the costs in January and February, compared


with the previous months

You are required to calculate the amortisation expense of the computer software for
disclosure in the statement of comprehensive income for the year ended 30 June 20x10.
2. The company also purchased a brand name on 1 October 20x9 under which new
products were going to be sold. The useful life of the brand name is five years. The costs
incurred during the purchase period were comprised of the following: R300 000 cash
cost, R20 000 for registration fees, and R25 000 for promoting the new products under
the brand. On 31 March 20x10, Bolting Ltd is offered a market-related price of R260 000
for the intangible asset. A verbal agreement is entered into to sell the brand name on
1 September 20x10. Bolting Ltds management intend honouring this agreement as they
now wish to sell the asset.
You are required to provide the effects of the above information pertaining to the brand
name on the statement of comprehensive income for the year ended 30 June 20x10.
3. During the 20x10 financial year, the useful life of intellectual property, which had been
correctly capitalised in prior years, was re-assessed. In the past, intellectual property
(purchased on 1 July 20x7 for R720 000) had been classified as an intangible asset with
an indefinite useful life. At 30 June 20x10, the remaining useful life was expected to be
nine years. Management would like this change in policy to be accounted for
retrospectively.
You are required to provide the journal entry for the amortisation expense of the
intellectual property for the year ended 30 June 20x10.
4.

Assuming that no impairment test has been performed in the 20x10 financial year,
discuss whether one should be performed for each of the three intangible assets on
30 June 20x10.

5.

If Bolting Ltd had to replace the intellectual property, the gross replacement cost is
R1 200 000. If Bolting accounts for intellectual property by using the revaluation model,
discuss how the company would account for this information.

Department of Accounting, UCT and Oxford University Press Southern Africa