Question

PharmaNiaga Bhd (PNB) is considering its intangible assets on how the matters below should be treated in its financial statements for the year ended 31 March 2020.

a). On 1 October 2019, PNB acquired Halia Bhd, a small company that specializes in pharmaceutical drug research and development on the usage of local source, halia hitam, for skin care products. The purchase consideration was by a share exchange and valued at RM35 million. The fair value of Halia Bhd’s net assets was RM15 million (excluding any items referred to below). Halia Bhd owns a patent for an established successful product that had a remaining life of 8 years. A firm specialist advisor, HebatBrand, has estimated the current value of this patent to be RM10 million, however the company is awaiting the outcome of clinical trials where the product has been tested to treat a different skin problem. If the trials are successful, the value of the product is estimated to be RM15 million. Also included in the company’s statement of financial position is RM2 million for medical research that has been conducted on behalf of a client.

b). PNB has developed and patented a new drug which has been approved for clinical use. The costs of developing the drug were RM12 million. Based on early assessments on its sales success, HebatBrand, has estimated its market value at RM20 million.

c).PNB’s manufacturing facilities have recently received a favorable inspection by government medical scientists. Consequently, the company has been granted an exclusive five-year license to manufacture and distribute a new vaccine. Although the license had no direct cost PNB, its directors feel its granting is a reflection of the company’s standing and have asked HebatBrand to value the license. Accordingly, they have placed a value of RM10 million on it.                                                                             

d) In the current accounting period, PNB has spent RM3 million sending its staff PNB’s on specialist training courses. Whilst these courses have been expensive, they have led to a marked improvement in production quality and staff now needs less supervision. This in turn led to an increase in revenue and cost reductions. The directors of PNB believe these benefits will continue at least three years and wish to treat the training costs as an asset.

e). In December 2019, PNB paid RM5 million for a television advertising campaign for its products that will run for 6 months from 1 January 2020 to 30 June 2020. The directors believe that increased sales as a result of the publicity will continue for two years from the start of the advertisements.

Required:

Explain with reasons and justifications how the directors of PNB should treat the above items in the financial statements for the year ended 31 March 2020.

Note: The values given by Hebatbrand can be taken as being reliable measurements. Ignore depreciation.

Answer 1

1) Since PNB has acquired Halia Bhd the assets should be recorded at the fair value on date of Acquisition. Purchase consideration paid for acquring the company i.e RM35 million of which the patent is RM 10 million, net asset is at fair value of RM 15 million and the balance amount is for goodwill RM 10 million.

Since Halia Bhd ( acquired)companies product is on a chinical trial and if passes it then the patent will be revalued at the end of financial year i.e 15 million provided the test results come before or at 31st March 2020. IF the trial test results come after 31st March 2020 there will be on revaluation in the current.

No intangible asset arising from research i.e RM 2 million(or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred as per IAS 38.

2) An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following:

(a) the technical feasibility of completing the intangible asset so that it will be available for use or sale.

(b) its intention to complete the intangible asset and use or sell it.

(c) its ability to use or sell the intangible asset.

(d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

In this case the cost of developing the drug is RM12 milion and should be recorded as an Asset in the financial statement as there is a future economic benifit seen. The market value i.e 20 RM should not be considered because it is only an estimation & and has no impact.

3) The license received from the government is in the form of a grant . IAS 20 provides guidance regarding it. If an asset is received free of cost from the govermnet then it should be recorded in the Financial Statements at a norminal cost. The Asset need to be recorded to give the investor a accurate detail of the assets & liability held by the company. The contention of the directors that its granting is a reflection of the company’s standing and have asked HebatBrand to value the license i.e at RM 10 million is incorrect .

4) It is correct that IAS 16 has ruled out the capitalization of any training cost ,but the case of INDOPCO v. Commissioner, 503 U.S. 79 (1992) provides some insite. In short, in this case it was decided that all such expenditure that promise future benefits that extends over number of periods shall be capitalized rather than allowed as a deduction from business income under profit and loss or in simple words treating it as expense.

In this question the management believe that the benifit of training cost will be received for 3 years hence the cost of RM 3 million can be capitalized for 3 year & amortized for this period.

5) As per IAS 38 an intangible asset can be recorded if

1) It is controlled by the entity

2) No physical substance

3) It is seperately identifiable

4) It should provide a future economic benifit to the entity

The economic benifit from the asset should be for an extended future period. Some entities incur huge expenditure on advertisement which gives them benifit for a huge substantial period i.e more than 2 years hence it would be unfeaseable to expense out the entire advertisement amount. In this case the director feels that the increase of sale because of this expenditure i.e RM 5 million would be for 2 years only which is not a significant duration hence it should be expensed in the financial period.