Ias 38 Practice Questions n2e3k

Innovate Company Ten years ago, Innovate developed a new game called ‘Our Sports’. This game sold over 10 million copies around the world and was extremely profitable. Due to its popularity, Innovat e release a new game in the Our Sports series every year. The games continue to be bestsellers. Th e directors have produced cash flow projections for the Our Sports series over the n ext five years. Based on these projections, they have prudently valued the Our Sports brand at $20 million and wis h to recognise this in the statement of financial position as at 30 September 20X3. On 30 September 20X3, Innovate also paid $1 million for the rights to the ‘Pets & Me’ videogame series after the original d eveloper went into istration. Required: Discuss the ing treatment of the above in the financial statements of Innovate for the year ended 30 September 20X3. HEYWOOD The problems of identifying and valuing intangible assets with a view to recognising them on the statement of financial position has been an area of inconsistent practice that has led to great debate within the ancy profession. IAS 38 Intangible Assets was issued in order to try and eliminate these inconsistent practices. Required: (a) Discuss the recognition and initial measurement criteria for intangible assets contained in IAS 38. (9 marks) (b) On the same date, but as a separate purchase to that of Fast Trak, Heywood acquired Steamdays, a company that operates a scenic railway along the coast of a popular tourist area. The summarised statement of financial position at fair values of Steamdays on 1 July 2012, reflecting the of the acquisition was: $000 Goodwill

200

Operating licence

1,200

Property – train stations and land

300

Rail track and coaches

300

Steam engines (2)

1,000 ––––––

Purchase consideration

3,000 ––––––

The operating licence is for ten years. It has recently been renewed by the transport authority and is stated at the cost of its renewal. The carrying amounts of the property and rail track and coaches are based on their estimated replacement cost. The carrying amount of the engines closely equates to their fair value less any disposal costs. On 1 August 2012 the boiler of one of the steam engines exploded, completely destroying the whole engine. Fortunately no one was injured, but the engine was beyond repair. Due to its age a replacement could not be obtained. Because of the reduced enger capacity the estimated value in use of the business after the accident was assessed at $2 million. enger numbers after the accident were below expectations even after allowing for the reduced capacity. A market research report concluded that tourists were not using the railway because of the fear of a similar accident occurring to the remaining engine. In the light of this the value in use of the business was reassessed on 30 September 2012 at $1·8 million. On this date Heywood received an offer of $900,000 in respect of the operating licence (it is transferable). Required: Briefly describe the basis in IAS 36 “Impairment of Assets” for allocating impairment losses; and show how each of the assets of Steamdays would be valued at 1 August 2012 and 30 September 2012 after recognising the impairment losses. (8 marks)

DEFER LLC Your client, a limited liability company, wishes to defer expenditure on development activities where possible and for as long as possible. The finance director has asked for your advice on the procedures to set up in order to identify relevant expenditure and comply with best ing practice. Required:

Draft the contents of a letter to the finance director of the company which addresses his concerns. (10 marks)

STARSKY It is a general application of the concept of prudence that the carrying amount of an asset should not be greater than the amount of cash that it will generate. IAS 36 Impairment of Assets gives guidance on the application of this principle in particular to non-current assets. Under the rules in IAS 36 an asset must be written down to its recoverable amount when this is less than its carrying amount. The standard ensures that impairment loss is measured and recognised on a consistent basis. Required: (a) Explain the need for IAS 36. marks)

(4

(b) Define and explain the concept of recoverable amount contained within IAS 36. (4 marks) (8 marks)