IAS 38 Intangible Assets: Homework

The account assistant has encountered the following matters during the preparation of the draft
financial statements of Darby for the year ending 30 September 20X9. He has given an
explanation of his treatment of them,

i. Darby spent $200,000 sending its staff on training courses during the year. This has already led
to an improvement in the company's efficiency and resulted in cost savings. The organiser of the
course has stated that the benefits from the training should last for a minimum of four years.
The assistant has therefore treated the cost of the training as an intangible asset and charged
six months' amortisation based on the average date during the year on which the training
courses were completed.

ii. During the year the company started research work with a view to the eventual development of
a new processor chip. By 30 September 20X9 it had spent $1.6 million on this project. Darby has
a past history of being particularly successful in bringing similar projects to a profitable
conclusion. As a consequence the assistant has treated the expenditure to date on this project
as an asset in the statement of financial position.

Darby was also commissioned by a customer to research and, if feasible, produce a computer
system to install in motor vehicles that can automatically stop the vehicle if it is about to be
involved In a collision. At 30 September 20X9, Darby had spent $2.4 million on this project, but
at this date it was uncertain as to whether the project would be successful. As a consequence
the assistant has treated the $2.4 million as an expense in the statement of profit or loss.

iii. Darby signed a contract (for an initial three years) in August 20X9 with a company called Media
Today to install a satellite dish and cabling system to a newly built group of residential
apartments. Media Today will provide telephone and television services to the residents of the
apartments via the satellite system and pay Darby $50,000 per annum commencing in
December 20X9. Work on the installation commenced on 1 September 20X9 and the
expenditure to 30 September 20X9 was $58,000. The installation is expected to be completed
by 31 October 20X9. Previous experience with similar contracts indicates that Darby will make
a total profit of $40,000 over the three years on this initial contract. The assistant correctly
recorded the costs to 30 September 20X9 of $58,000 as a non-current asset, but then wrote this
amount down to $40,000 (the expected total profit) because he believed the asset to be
impaired.
Required
For each of the above items (i) to (iii) comment on the assistant's treatment of them in the
financial statements for the year ended 30 September 20X9 and advise him how they should be
treated under International Financial Reporting Standards.
IAS 36 IMPAIRMENT

Question 1

AB acquired a plant on 1.1.03 for RM400,000 and expected to use it for 10 years. On 31.12.x4, the fair
value of the plant was RM440,000 and the remaining useful life was eight yeras. AB uses revaluation model
to measure the value of non current assets.

On 31.12.06, there were indications that the asset could be impaired. The value in use was calculated to
be RM180,000 and fair value less cost to sell was RM80,000.

Annual transfers were made from the revaluation reserve to retained earnings.

Required:
Discuss the accounting treatment in years 6 and 7.
AT 31.12.04
 Original deprn p.a. would be 40,000 (400K ÷ 10yrs)
 CV at 31.12.04 = 320K; FV = 440K
o Therefore, surplus on rev is 120K
o Dr Plant 120K
Cr ARR 120K
o New deprn will be based on the FV i.e 55K (440K ÷ 8 yrs)
o Annual transfer from rev reserve would be 15,000 (120K ÷ 8yrs)
AT 31.12.06
 CV at 31.12.06 = 330K [440 – (440÷8yrs)2]
 Bal ARR at 31.12.06 = 90K [120 – (120÷8yrs)2]
 RA = higher of NRV(80K) and VIU (180K), therefore is 180K
 IL is CV (330K) less RA (180K) which amount to 150K
 Of the 150K loss, 90K will be written off against the rev reserve; balance of 60K in the income stmn
IN YR7
 Deprn charge for year 7 is 30K (180K ÷ 6yrs)

Question 2

Alan Bhd rents out boats to customers at Lake Wonderful. These boats were bought on 1.1.x3 for
RM1,500,000 and were depreciated at 20% p.a. on cost. An accident took place and the business was badly
hit. On 31 December x4, the fair value less cost to sell of these boats was RM750,000 and the value in use
was RM680,000.

Required:
Determine the carrying amount of the boats
a) On 31.12.x4
b) On 31 December x5, if the demand for boats picked up and the boats now have a recoverable
amount of
i. RM650,000
ii. RM550,000
a) 31.12.x4; CA boats = 1,500K – (1,500 x 20% x 2yrs)
= 900K
RA = 750

IL = 150K  new CA = 750K

b) i. 31.12.x5; CA = 1,500 – 250 (750÷3yrs remaining - new deprn) -600 (AD) – 150 (IL)
= 500K
RA = 650K
There is reversal of IL.
But since if there is no IL taken place; CA shd be = RM600K (1,500K – 1,500K x 20% x 3yrs);
Its shd not exceed the CA of the asset had the impairment not taken place.
Reversal of IL = 100K (I/S)

New CA = 600K

ii. CA = 500K
RA = 550K
There is reversal of IL; but up to its RA of RM550K. Reversal = 50K. (I/S)

New CA = 550K

Question 3

Zin Bhd acquired a plant costing RM1million on 1.1.x1. Economic life was estimated to be 10 years with no
scrap value. On 31.12.x2, the fair value of the plant was RM960,000 and Zin adopt the revaluation model
to measure the value of the plant.

In year x4, the demand for the product manufactured by this plant dropped and the recoverable amount
of the machine on 31.12.x4 was RM660,000.

In year x6, the market share of the products manufactured by this plant picked up and its recoverable
amount was RM800,000.

Required:
Discuss the accounting treatment for the machine for the years x1 to x6.

AT 31.12.02
 Original deprn p.a. would be 100,000 (1,000K ÷ 10yrs)
 CV at 31.12.02 = 800K; FV = 960K
o Therefore, surplus on rev is 160K
o Dr Plant 160K
Cr ARR 160K
o New deprn will be based on the FV i.e 120K (960K ÷ 8 yrs)
o Annual transfer from rev reserve would be 20,000 (160K ÷ 8yrs)
AT 31.12.04
 CV at 31.12.04 = 720K [960 – (960÷8yrs)2]
 Bal ARR at 31.12.06 = 120K [160 – (160÷8yrs)2]
 RA = 660K
 IL is CV (720K) less RA (660K) which amount to 60K
o All IL of 60K will be written off against the rev reserve (Bal = 60K)
o New deprn will be based on the new amt i.e. 110K (660K ÷6yrs)
o Annual transfer from rev reserve 10K (60K ÷ 6yrs)
At 31.12.06
 CV at 31.12.06 = 440K [660 – (660÷6yrs)2]
 RA = 480,000
 There is reversal of impairment
o But reversal should not exceed the original amount or depreciated CV had the impairment not
taken place
o If no IL was recognised earlier, the CV of the plant = 480K [960K – (960K÷8yrs)4]
o Since CV = 440K, although RA = 480K, the reversal is limited to 40K (480K – 440K).
o 40K will be treated as an increase in rev reserve
IN x7
 New deprn will be based on new amt = 110K (440K÷4yrs)
 Annual transfer from rev reserve = 20K [(40Kbal + 40K increase)÷4yrs)

IAS 40 INVESTMENT PROPERTY

Question 1

The accounting treatment of investment properties is prescribed by IAS 40 Investment Property.

Required:
(i) Define investment property under IAS 40 and explain why its accounting treatment is
different from that of owner-occupied property;
(ii) Explain how the treatment of an investment property carried under the fair value model
differs from an owner-occupied property carried under the revaluation model.
(5 marks)

Question 2

Speculate owns the following properties at 1 April 2012:

Property A: An office building used by Speculate for administrative purposes with a depreciated historical
cost of $2 million. At 1 April 2012 it had a remaining life of 20 years.

After a reorganisation on 1 October 2012, the property was let to a third party and reclassified as an
investment property applying speculate’s policy of the fair value model. An independent valuer assessed
the property to have a fair value of $2·3 million at 1 October 2012, which had risen to $2·34 million at 31
March 2013.
Property B: Another office building sub-let to a subsidiary of Speculate. At 1 April 2012, it had a fair value
of $1·5 million which had risen to $1·65 million at 31 March 2013.

Required:
Prepare extracts from Speculate’s entity statement of profit or loss and other comprehensive income
and statement of financial position for the year ended 31 March 2013 in respect of the above properties.
In the case of property B only, state how it would be classified in Speculate’s consolidated statement of
financial position.
Note: Ignore deferred tax. (5 marks)

5 (a) (i) An investment property is land or buildings (or a part thereof) held by the owner to generate rental
income or for capital
appreciation (or both) rather than for production or administrative use. It would also include property held
under a
finance lease and may include property under an operating lease, if used for the same purpose as other
investment
properties. Generally, non-investment properties generate cash flows in combination with other assets,
whereas a
property that meets the definition of an investment property means that it will generate cash flows that
are largely
independent of the other assets held by an entity and, in that sense, such properties do not form part of
the entity’s
normal operations.
(ii) Superficially, the revaluation model and fair value sound very similar; both require properties to be
valued at their fair
value which is usually a market-based assessment (often by an independent valuer). However, any gain (or
loss) over
a previous valuation is taken to profit or loss if it relates to an investment property, whereas for an owner-
occupied
property, any gain is taken to a revaluation reserve (via other comprehensive income and the statement
of changes in
equity). A loss on the revaluation of an owner-occupied property is charged to profit or loss unless it has a
previous
surplus in the revaluation reserve which can be used to offset the loss until it is exhausted. A further
difference is that
owner-occupied property continues to be depreciated after revaluation, whereas investment properties
are not
depreciated.
(b) Extracts from Speculate’s financial statements for the year ended 31 March 2013
(workings in brackets in $’000)
$’000
Statement of profit or loss and other comprehensive income
Depreciation of office building (A) (2,000/20 years x 6/12) (50)
Gain on investment properties: A (2,340 – 2,300) 40
B (1,650 – 1,500) 150
Other comprehensive income 350

Statement of financial position

Non-current assets
 Investment properties (A and B) (2,340 + 1,650) 3,990

Equity
Revaluation reserve (A) (2,300 – (2,000 – 50)) 350

IAS 20 Government Grant

Question

Sponger has been having financial difficulties recently due to the economic climate in its industry sector.
However, its financial director Mr Philip has discovered that there are a number of schemes by which he
can obtain government financial assistance. Details of the assistance obtained are as follows:

(a) Sponger has received three grants of $10,000 each in the current year relating to on-going research and
development projects. One grant relates to the Cuckoo project which involves research into the effect of
various chemicals on the pitch of the human voice. No constructive conclusions have been reached yet.

The second relates to the development of a new type of hairspray which is expected to be extremely
popular. Commercial production will commence in 2017 and large profits are foreseen. The third relates
to the purchase of high powered microscopes.

(b) In 2014 sponger premises were entirely isolated from the outside world for four months due to the
renovation of roads by the local council. All production was lost in that period. Mr Philip has been assured
by the council’s officers that a $25,000 compensation grant will be paid on submission of the relevant
triplicate form. Mr Philip had not yet filled in the form by 31 December 2015.

(c) Sponger entered into an agreement with the government that. In exchange for a grant of $60,000, it will
provide “vocational experience” tours around its factory, for twelve young criminals per month over a five-
year period starting on 1 January 2015. The grant was to be paid on the date Sponger purchased a minibus
(useful life three years) to take the inmates to the factory and back. The bus was bought and the grant
received on 1 January 2015.

The grant becomes repayable on pro rata basis for every monthly visit not fulfilled. During 2015 five visits
did not take place due to the pressure of work and this pattern is expected to be repeated over the next
four years.

No repayment has yet been made.

Required

Write a report to Mr Philip explaining to him how he should account for the above grants in the accounts
for the year ended 31 December 2015.
(12 marks)

IAS 23 BORROWING COSTS

QUESTION 1
Barrow Bhd raised finance amounting to $450,000,000. The borrowing was for the purpose of constructing
a new office building and for working capital requirements. Barrow incurred
$100,000,000 and $200,000,000 on 1 January 2008 and 1 July 2008 respectively for the construction of the
new office building. It is the policy of the company to start capitalise borrowing cost that are directly
attributable to the acquisition, construction or production of a qualifying asset.

There was no capital repayment in 2008 with respect of the borrowings. The details of the borrowings on
1 January 2008 were as follows:

7.5% long term loan 100,000,000

8% convertible debentures 180,000,000
13% redeemable preference shares 170,000,000

Required
Compute the capitalisation rate and the amount of interest that qualifies for capitalisation for the year
ended 31.12.08.
QUESTION 3
(a) Apex is a publicly listed supermarket chain. During the current year it started the building of a new
store. The directors are aware that in accordance with IAS 23 Borrowing costs certain borrowing costs
have to be capitalised.
Required
Explain the circumstances when, and the amount at which, borrowing costs should be capitalised in
accordance with IAS 23.
(5 marks)
(b) Details relating to construction of Apex's new store:
Apex issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 April 20X8. The
loan is redeemable at a premium which means the loan has an effective finance cost of 7.5% per annum.
The loan was specifically issued to finance the building of the new store which meets the definition of a
qualifying asset in IAS 23. Construction of the store commenced on 1 May 20X8 and it was completed and
ready for use on 28 February 20X9 but did not open for trading until 1 April 20X9. During the year trading
at Apex's other stores was below expectations so Apex suspended the construction of the new store for
a two-month period during July and August 20X8. The proceeds of the loan were temporarily invested for
the month of April 20X8 and earned interest of $40,000.
Required
Calculate the net borrowing cost that should be capitalised as part of the cost of the new store and
the finance cost that should be reported in profit or loss for the year ended 31 March 20X9.
(5 marks)

Where borrowing costs are directly incurred on a ‘qualifying asset’, they must be capitalised as part of
the cost of that asset.
A qualifying asset may be a tangible or an intangible asset that takes a substantial period of time to get
ready for its intended
use or eventual sale. Property construction would be a typical example, but it can also be applied to
intangible assets during
their development period. Borrowing costs include interest based on its effective rate (which
incorporates the amortisation of
discounts, premiums and certain expenses) on overdrafts, loans and (some) other fi nancial instruments
and fi nance charges
on fi nance leased assets. They may be based on specifi cally borrowed funds or on the weighted
average cost of a pool of funds.
Any income earned from the temporary investment of specifi cally borrowed funds would normally be
deducted from the amount
to be capitalised.
Capitalisation should commence when expenditure is being incurred on the asset, which is not
necessarily from the date
funds are borrowed. Capitalisation should cease when the asset is ready for its intended use, even
though the funds may still be incurring borrowing costs. Also capitalisation should be suspended if there
is a suspension of active development of the
asset.
Any borrowing costs that are not eligible for capitalisation must be expensed. Borrowing costs cannot be
capitalised for assets
measured at fair value.

(b) The fi nance cost of the loan must be calculated using the effective rate of 7·5%, so the total fi nance
cost for the year ended
31 March 2010 is $750,000 ($10 million x 7·5%). As the loan relates to a qualifying asset, the fi nance
cost (or part of it in
this case) can be capitalised under IAS 23.
The Standard says that capitalisation commences from when expenditure is being incurred (1 May 2009)
and must cease when
the asset is ready for its intended use (28 February 2010); in this case a 10-month period. However,
interest cannot be capitalised
during a period where development activity is suspended; in this case the two months of July and
August 2009. Thus only eight
months of the year’s fi nance cost can be capitalised = $500,000 ($750,000 x 8/12). The remaining four-
months fi nance costs
of $250,000 must be expensed. IAS 23 also says that interest earned from the temporary investment of
specifi c loans should be
deducted from the amount of fi nance costs that can be capitalised. However, in this case, the interest
was earned during a period
in which the fi nance costs were NOT being capitalised, thus the interest received of $40,000 would be
credited to the income
statement and not to the capitalised fi nance costs.
In summary:
$
Income statement for the year ended 31 March 2010:
Finance cost (debit) (250,000)
Investment income (credit) 40,000
Statement of fi nancial position as at 31 March 2010:
Property, plant and equipment (fi nance cost element only) 500,000