Question

Duchamp plc is a company that publishes regional newspapers. Each newspaper contains news relevant to a specific town or city.

On 1^st July 2019 Duchamp plc purchased the ‘Winchester Weekly Bulletin’ title from a competitor. This title was launched in 1934 and is still popular. The title cost Duchamp £350,000.

The CEO of Duchamp plc felt it was inconsistent to have one title recognised on the Statement of financial position when other titles that were created ‘in-house’ by Duchamp were not capitalised. He has requested the Finance Director work out the expenditure on these in-house titles and capitalise it along with the Winchester Weekly Bulletin.

The only other title purchased by Duchamp plc is the ‘Cambridge Evening Mercury’ for which it paid £100,000 five years ago. Since then circulation has doubled and the CEO feels the magazine must consequently be worth at least twice as much. He has suggested the title is revalued to reflect this.

On 1^st October 2019 the company began developing some new software that, if successful, would reduce the cost of producing the newspapers. The initial design work proceeded quickly but building the new software has proved difficult due to lack of compatibility between the different systems. Development costs at 30^th June 2020 had reached £65,000 and the board are questioning whether it is worth investing further in what might be a failing project when similar packages could be bought ‘off the shelf’.

Requirement

1. Discuss how the purchase of the Winchester Weekly Bulletin should be treated in the financial statements including how it should be measured subsequently.  (3 marks)

2. Explain whether the CEO’s ideas with respect to the in-house titles and the Cambridge Evening Mercury are acceptable.  (3 marks)

3. Explain whether the costs incurred in the process of developing the new software can be capitalised as at 30^th June 2020. (You are not required to repeat all the PIRATE criteria).  (4 marks)

Answer 1

As per IAS 28, and intangible asset may be procured or self-generated. However, in order to be capitalized in the Balance Sheet, it needs to fulfill the following 2 criteria:

i. It should be probable that the future economic benefits that are attributable to the asset flow to the entity, and,

ii. The cost of the asset can be measured reliably.

In the given case, The Winchester Weekly Bulletin purchased by Duchamp plc is a kind of intellectual property. The Title was developed in the year 1934 and since then it has been very popular. The use of that title is surely going to boost the sale of Duchamp's newspapers. Hence £350,000 spent for the purchase of the title should be capitalized in the financial statements. It should appear at cost as an Intangible Asset in the Balance Sheet and be amortized over its useful life.

It is very difficult to determine their direct costs or a clear market value of in-house intellectual properties. Hence, the in-house titles developed by Duchamp should not be capitalized. Rather the amount spent should be shown as an expenditure in the Profit and Loss account.

Another title purchased namely 'Cambridge Evening Mercury’ had been bought 5 years ago and sales have doubled since then. However, no addition in value of the title needs to be made owing to this increment in sales.

In the case of software development costs, the initial research costs should be charged to expense. However, the development costs should be capitalized when and only when it becomes probable that the future benefits attributable to the new software would accrue to the enterprise or when technological feasibility is established or when it is clear of the entity's intent to use or sell the software and the availability of resources to complete it is established and the costs become measurable.

In the given case we can see that till 30th June 2020 the development costs has amounted to £65,000 but the board is not confident yet about the technical and economical feasibility of developing the software.

Hence, in the given situation, £65,000 spent on development cost of the software should be charged to Profit and Loss account as an expenditure.