718 the entity as a result of past

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13 November 2017

                                                                                               

Mr Christopher Sampson

Managing Director, Beachlife Ltd
Level 7, 927 William Street
Brisbane QLD 4000

 

Dear Christopher

 

It
gives us immense pleasure to welcome you to the “Magenta and Associates”
family. We appreciate your interest on our services regarding our telephonic
conversation this morning. Magenta and associates have specialised its
accounting services adhering to Australian Accounting Standards Board,
Corporations Act, Financial Accounting Standard Board, International Financial
Regulatory Systems, Accounting Professional and Ethical Standards Board and
many more. We have a history of providing the best consultant services to its
customers. It is important to have a healthy account to run a business
successfully and Magenta and Associates helps to solve and make the imperative decisions
related to distinctive accounting issues.

I
would like to address the 2 issues, you have raised in your letter and require our
advice on rightfully presentation assets and revenue and related costs and
their potential changes in accounting policies are discussed below:

The
intangible asset relating to brand “Sun ‘n Surf Shirts” which has been
developed by the business is an Internally Generated Intangible Assets cannot
be included in the balance sheet of the company under “directors valuation”.

In order to recognize a brand in the
financial statements, it needs to fulfil the definition criteria of an asset,
which by the IASB defined as a “present economic resource controlled by the
entity as a result of past events” (Clark & Brown, 2013, p.4). The IASB
also 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 be
fulfilled: The brand should be controlled by the entity, should be able to
deliver future economic benefits and should result from past events.

The
intangible asset should be transferred to the balance sheet for necessary
recognition and amortization. in this case, the intangible asset is worth
recognize $800,000 dated at 30 June 2018 with the reference as a ‘directors’
valuation’. This will imply that the company changes the accounting policy and
recognizes the cost of the internally developed intangible assets so that it is
charged to expense as at June 30, 2018. In addition, the intangible asset have
a useful life that is , it should thus be amortized over that duration. The
amount to be recognized for the amortization purposes are expected to be
reported at cost ($800,000) less residual value if applicable.

The
best accounting treatment for this agreement/ transaction is to consider both
the purchase price of the equipment and the maintenance cost. The board of
should agree that the purchase of equipment be recorded at cost upon delivery
at $90,000. To handle the uncertainties surrounding who will cater for the
repair and since the agreement clause provides for refund to the company if
Beachlife Ltd fails to maintain the equipment, the board should put in place a
provision of $7,500 as repair and maintenance cost of equipment. This is
because the repair cannot be avoided and they will still recover the amount
($7,500) even if the company provides the maintenance service or not. The
recovery can be made through saving the $7,500 if the maintenance is provided
or the 15% *90,000 ($13,500) if the company defaults in maintenance.

 

 

According to AASB 138-118 An entity shall
disclose the followings for each class of intangible assets, distinguishing
between internally generated intangible asset and other intangible assets.

a)    
Whether the
useful lives are infinite or finite, if finite, the useful lives or the amortisation
rates used;

b)    
The amortisation
method used for intangible assets with finite lives;

c)    
The gross
carrying amount and any accumulated amortisation at the beginning and the end
of the period;

d)    
The line
items of comprehensive income in which any amortisation of intangible assets is
include

e)    
A reconciliation
of the carrying amount at the beginning and the end of the period showing the
addition , indication separately those from internally development, those
acquired separately, and those acquired through business combinations.

 

 

Since the right to use a brand can be
licensed and individually exchanged, it is certainly considered to be an
identifiable asset. The reason for the IASB to require this additional
criterion does not seem to be related to brands. Instead, it seems that the
IASB is trying to reduce the residual amount that results from business
acquisitions and is reported as goodwill. Goodwill has an infinite economic
lifetime and should be tested yearly for impairment as it is not allowed to be
amortized (Nobes & Parker, 2016). On the other hand, brands have a
restricted economic lifetime and are usually amortized up to 20 years
(Artsberg, 2005). By allowing the recognition of brands that could be
identified and separated from goodwill, the residual amount will continually
decrease as the brand is amortized. However, as with all types of assets, it is
also required that the “cost of the asset can be measured reliably” (IAS 38
para. 21) and this is not applicable to internally generated brands as
indicated by the IASB. In fact, IAS 38 paragraph 63 explicitly says that: “Internally
generated brands, mastheads, publishing titles, customer lists and items
similar in substance shall not be recognised as intangible assets” (IAS 38,
para. 63).

 

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