718 the entity as a result of past

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massociates.com.au13 November 2017                                                                                                Mr Christopher SampsonManaging Director, Beachlife LtdLevel 7, 927 William StreetBrisbane QLD 4000 Dear Christopher Itgives us immense pleasure to welcome you to the “Magenta and Associates”family.

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We appreciate your interest on our services regarding our telephonicconversation this morning. Magenta and associates have specialised itsaccounting services adhering to Australian Accounting Standards Board,Corporations Act, Financial Accounting Standard Board, International FinancialRegulatory Systems, Accounting Professional and Ethical Standards Board andmany more. We have a history of providing the best consultant services to itscustomers. It is important to have a healthy account to run a businesssuccessfully and Magenta and Associates helps to solve and make the imperative decisionsrelated to distinctive accounting issues.Iwould like to address the 2 issues, you have raised in your letter and require ouradvice on rightfully presentation assets and revenue and related costs andtheir potential changes in accounting policies are discussed below:Theintangible asset relating to brand “Sun ‘n Surf Shirts” which has beendeveloped by the business is an Internally Generated Intangible Assets cannotbe included in the balance sheet of the company under “directors valuation”. In order to recognize a brand in thefinancial statements, it needs to fulfil the definition criteria of an asset,which by the IASB defined as a “present economic resource controlled by theentity as a result of past events” (Clark & Brown, 2013, p.

4). The IASBalso states that an monetary resource as “a right, or other source of value,that is capable of producing economic benefits” (Clark & Brown, 2013, p.4).Accordingly, the definition of an asset includes three criteria that need to befulfilled: The brand should be controlled by the entity, should be able todeliver future economic benefits and should result from past events. Theintangible asset should be transferred to the balance sheet for necessaryrecognition and amortization.

in this case, the intangible asset is worthrecognize $800,000 dated at 30 June 2018 with the reference as a ‘directors’valuation’. This will imply that the company changes the accounting policy andrecognizes the cost of the internally developed intangible assets so that it ischarged to expense as at June 30, 2018. In addition, the intangible asset havea useful life that is , it should thus be amortized over that duration. Theamount to be recognized for the amortization purposes are expected to bereported at cost ($800,000) less residual value if applicable.Thebest accounting treatment for this agreement/ transaction is to consider boththe purchase price of the equipment and the maintenance cost.

The board ofshould agree that the purchase of equipment be recorded at cost upon deliveryat $90,000. To handle the uncertainties surrounding who will cater for therepair and since the agreement clause provides for refund to the company ifBeachlife Ltd fails to maintain the equipment, the board should put in place aprovision of $7,500 as repair and maintenance cost of equipment. This isbecause the repair cannot be avoided and they will still recover the amount($7,500) even if the company provides the maintenance service or not. Therecovery can be made through saving the $7,500 if the maintenance is providedor the 15% *90,000 ($13,500) if the company defaults in maintenance.  According to AASB 138-118 An entity shalldisclose the followings for each class of intangible assets, distinguishingbetween internally generated intangible asset and other intangible assets.a)    Whether theuseful lives are infinite or finite, if finite, the useful lives or the amortisationrates used;b)    The amortisationmethod used for intangible assets with finite lives;c)    The grosscarrying amount and any accumulated amortisation at the beginning and the endof the period;d)    The lineitems of comprehensive income in which any amortisation of intangible assets isincludee)    A reconciliationof the carrying amount at the beginning and the end of the period showing theaddition , indication separately those from internally development, thoseacquired separately, and those acquired through business combinations.

  Since the right to use a brand can belicensed and individually exchanged, it is certainly considered to be anidentifiable asset. The reason for the IASB to require this additionalcriterion does not seem to be related to brands. Instead, it seems that theIASB is trying to reduce the residual amount that results from businessacquisitions and is reported as goodwill. Goodwill has an infinite economiclifetime and should be tested yearly for impairment as it is not allowed to beamortized (Nobes & Parker, 2016).

On the other hand, brands have arestricted economic lifetime and are usually amortized up to 20 years(Artsberg, 2005). By allowing the recognition of brands that could beidentified and separated from goodwill, the residual amount will continuallydecrease as the brand is amortized. However, as with all types of assets, it isalso required that the “cost of the asset can be measured reliably” (IAS 38para. 21) and this is not applicable to internally generated brands asindicated by the IASB.

In fact, IAS 38 paragraph 63 explicitly says that: “Internallygenerated brands, mastheads, publishing titles, customer lists and itemssimilar in substance shall not be recognised as intangible assets” (IAS 38,para. 63).  

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