Question 3

A. Discuss the relationship between integrity and usefulness when recognising certain internally generated intangible assets. Do you think it leads to incorrect reporting of intangible assets? Give an example to support your answer.

B. Iinvent Ltd reports the following intangible assets

                                                        $m

Licence at cost                             15

Less Accumulated amortisation 5

Goodwill at cost                           60

Brand Name                                 90

Trademarks at cost                     25

Patents at directors’ valuation 120

Less Accumulated amortisation (40)

The following information is available:

(i) Patents were acquired at a cost of $90m and were revalued soon afterwards. They have an estimated life of 20 years of which 15 remain.

(ii) The trademark can be renewed indefinitely subject to continued use. The costs were for registration fees which were initially expenses but recognised five years later as the trademark became recognised by consumers.

(iii) Goodwill has been purchased 2 years ago and will be amortised on the straight line basis.

(iv) The brand name has been internally generated and is stated at fair value.

(v) The licence has a 15 year life of which 10 years remain. It can be traded in an active market and has a fair value of 25m.

You are required to:

a. State how each asset or class of asset, should be reported in accordance with AASB 138.

b. Apply AASB 138 and state the carrying amount and whether each asset/asset class should be amortised. As part of this answer specify any choice of methods permitted for Iinvent Ltd.

(NOTE: in completing your answers state any assumptions you might make)

C. Flyabout Ltd incurred expenditure researching and developing a new Drone prototype. At the end of 2017 management determined that the research and development project was unlikely to succeed because trials of the prototype had been unsuccessful. During 2018 a breakthrough in technology improved chances of the product succeeding and development resumed. The project was completed in 2018. At the end of 2018 costs incurred on the project were expected to be recoverable. Flyabout expects that 15% of the project revenue will be received in 2019, 25% in 2020, 30% in 2021 and 30% in 2022. After 4 years the product will be at the end of its useful life because the technology will be outdated. Costs incurred were as follows:

            Research Development

                ($000)     ($000)

2017         50             18

2018         15             75

You are required to provide answers to the following:

a. How much research and development expenditure should be recognised as an expense in each of 2017 and 2018?

b. State how much expenditure should be carried forward (deferred) and reported in the statement of financial position/balance sheet at the end of 2017 and 2018.

c. Prepare journal entries for the amortisation of deferred costs in 2019 and 2020 assuming actual revenues as expected. State the amount of deferred expenditure carried forward in the statement of financial position in relation to the deferred costs. 

d. Assume that after charging amortisation based on sales revenue at the end of 2018 the discounted net cash flows expected to be generated from the deferred expenditure were estimated at $20 000. Prepare any journal entries required to account for this information.