FINANCIAL ACCOUNTING II INTANGIBLE ASSETS (IAS 38)

QUESTION 1

PR Bank is a commercial bank servicing various individual customer. Their market share has
increased significantly in the commercial banking category, as a result of their excellent service
they provide to their customers. This has resulted in one of their directors proposing that they
recognise an intangible asset called “Customer service”. The director believes that the staff training
cost, salaries and wages paid to staff and advertising campaigns incurred by the company should
no longer be expensed but capitalised to the proposed intangible asset (the so called “customer
service”).

Required:

1.1. Discuss in detail whether the Customer Service can be recognised as an intangible asset in
terms of IAS 38 Intangible Assets.

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 QUESTION 2

Chicken Dustie Ltd is a well-known chicken braaiing business operating in various corners of
Umlazi. This business was founded and registered by Ms Khwezikazi. Mr Mzizi wants to start
almost a similar business to Chicken Dustie Ltd in his hometown, KwaMashu. He approached Ms
Khwezikazi for negotiations to purchase the Chicken Dustie Ltd brand. The agreement from the
negotiations is as follows:

▪ The brand purchase price was R3 000 000, renewable after 10 years at a cost of R1
500 000 for another 10 years which was considered significant by Mr Mzizi.
▪ Ms Khwezikazi only issued the rights to operates in a form of a certificate to Mr Mzizi and
no other assets were provided to him.

Required:

2.1. Discuss whether Mr Mzizi should recognise the above purchase as a tangible asset
measured using IAS 16 or intangible asset measured using IAS 38.

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 Question 3

V-Trend Ltd is a well-known fashion brand with various stores located across South Africa. Due to
the impact of Corona Virus Deases of 2019 (COVID19), they were forced to close down a number
of shops. Its management took a decision to have an online store, where customers will place an
order, make payment and the items will be delivered to the customer. A feasibility study was
commissioned by V-Trend Ltd in order to determine whether customers will be interested in the
online store. V-Trend paid R320 000 for this study on 31 January 2021. A further R250 000 was
also incurred for the planning stage on 15 February 2021.

Once the planning stage was completed, V-Trend bought hardware and other related
infrastructural hardware for R360 000. This amount was incurred evenly from 20 February 2021 to
31 May 2021. On 15 June 2021, they also incurred R60 000 for the graphic designs and the
uploading of relevant content on the website.

The website was completed on 31 July 2021 and was operating on 1 August 2021. The specialised
task team was hired to monitor and run the website for the period of 2 years. The total cost of the
task team was R450 000 per month.

The websites are measured using net replacement value method (Assuming that an active market
exist). The fair value of the website was R980 000 on 31 December 2021. The website has a
useful life of 5 years. It is expected that the sales will increase by 120% each year as a result of
this online store.

REQUIRED:

3.1. Prepare the necessary journal entries to record the above transactions for the year ended
31 December 2021.
3.2. Prepare the significant accounting policies note and intangible asset note for the year
ended 31 December 2021.
3.3. Prepare the statement of comprehensive income for the year ended 31 December 2021
3.4. Prepare the statement of financial position as at 31 December 2021.

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 QUESTION 4

Mabuza Ltd is in a retail business and is currently undertaking various projects which are part of
their expansion goal which will position them among the top 3 retail businesses in South Africa.
During the current year, they are busy with the following projects amongst other projects.

1. Tangible assets.
Their tangible asset purchase prices were as follows:
Vehicle R6 500 000
Equipment R19 800 000
Machinery R36 000 000

Notes to tangible assets:

▪ Vehicles were all purchased on 1 January 2020. They are depreciated on a straight
line over their useful life of 6 years. The residual value on vehicles is R500 000.
Vehicles are measured using cost model. Their recoverable amount on 31
December 2020 was R5 500 000, on 31 December 2021 was R3 500 000 and on
31 December 2022 was R4 000 000.
▪ Equipment were all purchased on 1 January 2019. Equipment is depreciated on a
straight-line basis over its useful life of 10 years to a nil residual value. The
equipment is measured using net replacement value method. The fair value of the
equipment on 31 December 2020 was R28 000 000. The equipment was tested for
impairment on 31 December 2021, where it was discovered that the recoverable
amount of the equipment was R21 000 000. The recoverable amount of the
equipment on 31 December 2022 was estimated to be R24 000 000.
▪ Machineries were purchased on 1 January 2020. They are depreciated over their
useful life of 15 years to a Nil residual value. Machineries are measured using cost
model.
o On 1 January 2022, a machinery to the value of R5 000 000 was purchased
on cash (this balance is not included on the purchase prices above). The
new machinery is to be depreciated over 5 years to a nil residual value. The
new machinery is to be used for the purposes of research and development
of various projects undertaken by Mabuza Ltd. The new machinery is to be
used 40% for the “Piizo project”, 40% for the “Lee Project” and 20% for the
“Maiii Project”. You may assume the depreciation was incurred evenly during
the period.

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2. Intangible asset.
The intangible assets are made up of the following assets:
2.1. Goodwill.
The purchased goodwill of R6 800 000 was acquired through a business
combination on 1 January 2019. The goodwill was tested for impairment and its
recoverable amount was R5 800 000 on 31 December 2019, R8 900 000 on 31
December 2020, R7 500 000 on 31 December 2021 and R5 500 000 on 31
December 2022.

2.2. Internally generated intangible assets

Mabuza Ltd started developing the following intangible assets:
Piizo Project:
Mabuza Ltd started the research and development on this project on 1 January
2021. During 2021, a total cost of R3 600 000 was incurred on this project. The first
4 months of the project represent the research work, while further 4 months on the
project represent development, where some of the recognition criteria for
development were not met. The remaining 4 months represent the development on
the project where all development criteria were met.
During 2022, a total cost of R4 500 000 was incurred on this project. The cost of
2022 excludes the allocated depreciation on the machinery (see note 1).

Lee Project:
Mabuza Ltd started the research and development on this project on 1 January
2021. During 2021, a total cost of R6 000 000 was incurred on this project. The first
6 months of the project represent the research work while the remaining 6 months
represent the development on the project where all development criteria were met.
During 2022, a total cost of R9 800 000 was incurred on this project. The cost of
2022 excludes the allocated depreciation on the machinery (see note 1).

Maii Project:
Mabuza Ltd started the research and development on this project on 1 January
2022. During 2022, a total cost of R 7 200 000 was incurred the research phase of
this project. The cost of 2022 excludes the allocated depreciation on the machinery.

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Required:

4.1. Prepare the general journals for Mabuza Ltd for the year ended 31 December 2019 to
31 December 2022.
4.2. Prepare the statement of comprehensive income for the year ended 31 December 2019
to 31 December 2022.
4.3. Prepare the statement of financial position for the year ended 31 December 2019 to 31
December 2022.
4.4. Prepare the following notes for the year ended 31 December 2019 to 31 December
2022:
4.4.1. Accounting policies
4.4.2. Profit before tax
4.4.3. Property plant and equipment
4.4.4. Intangible assets

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Question 5
Alpha Ltd is a company that holds several intangible assets as its main business. The following
information in respect of these intangible assets on 31 December 2014 is available:

1. Patents with a cost of R3 000 000 were purchased on 1 January 2012. The expected useful life
of the patents was established as 15 years on the date of acquisition. Patents are amortised on
a straight-line basis over their useful life with residual values that are negligible.

2. Copyright of several publications was acquired on 1 July 2014 for R4 900 000. Legal costs and
other professional costs to complete the transaction amounted to R100 000. On 1 July 2014 it
was estimated that the copyright will have a useful life of 10 years, using the straight-line method.

3. On 31 December 2014, there was an indication of impairment because the estimated revenue
that would be earned over the remaining period of patent is significantly lower than was originally
expected. The following information was collected:

• The fair value of the patents, if sold, would be R2 000 000. Brokers indicated that a fee of
2.5% would be charged on such sale transactions.

• The patents are expected to generate income (royalties) of R550 000 cash per annum over
their remaining useful life. The related costs are expected to be R50 000 cash per annum.

Required:
Disclose the profit before tax and intangible assets notes for the year ended
31 December 2014, in accordance with IFRSs.

NB : Ignore accounting policies notes.

Show all your workings.
(Source: MUT final Exam, 2016)

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Question 6
1. Discuss situation where it is permissible to capitalise an internally generated intangible
asset?
2 Discuss the rationale for not recognising advertising as an asset?
3 Explain the difference between goodwill and other intangible assets.
4 Indicate two aspects that you would consider when determining the useful life of an intangible
asset.
5 Explain how you should determine the residual value of an intangible asset.
(Source: MUT final Exam, 2016)

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