Question

Case study 6.1

Accounting for brands

West Ltd is a leading company in the sale of frozen and canned fish produce. These products are sold under two brand names. Fish caught in southern Australian waters are sold under the brand ‘Artic Fresh’, which is the brand the company developed when it commenced operations and which is still used today. Fish caught in the northern oceans are sold under the brand name ‘Tropical Taste’, the brand developed by Fishy Tales Ltd. West Ltd acquired all the assets and liabilities of Fishy Tales Ltd a number of years ago when it took over that company’s operations.

West Ltd has always marketed itself as operating in an environmentally responsible manner, and is an advocate of sustainable fishing. The public regards it as a dolphin-friendly company as a result of its previous campaigns to ensure dolphins are not affected by tuna fishing. The marketing manager of West Ltd has noted the efforts of the ship, the Steve Irwin, to disrupt and hopefully stop the efforts of whalers in the southern oceans and the publicity that this has received. He has recommended to the board of directors that West Ltd strengthen its environmentally responsible image by guaranteeing to repair any damage caused to the Steve Irwin as a result of attempts to disrupt the whalers. He believes that this action will increase West Ltd’s environmental reputation, adding to the company’s goodwill. He has told the board that such a guarantee will have no effect on West Ltd’s reported profitability. He has explained that, if any damage to the Steve Irwin occurs, West Ltd can capitalise the resulting repair costs to the carrying amounts of its brands, as such costs will have been incurred basically for marketing purposes. Accordingly, as the company’s net asset position will increase, and there will be no effect on the statement of profit or loss and other comprehensive income, this will be a win–win situation for everyone.

Required

The chairman of the board knows that the marketing manager is very effective at selling ideas but knows very little about accounting. The chairman has, therefore, asked you to provide him with a report advising the board on how the proposal should be accounted for under accounting standards and how such a proposal would affect West Ltd’s financial statements.

1. Accounting for the guarantee:

• Is there a liability? Legal or constructive? What is the past event? What obligation exists?

• Should it be recognised?

• How is it to be measured?

• Contingent liability?

Expect that a provision/contingent liability would need to be raised in relation to the guarantee. Measurement issues may lead to the need for a contingent liability.

2. Can costs be capitalised into brands?

• Note one brand is internally generated and one is acquired. The internally generated brand “Antartic Fresh” will not be recognised while “Tropical Taste” was acquired in a business combination. Accounting for internally generated brands differs from that for brands acquired in a business combination – explain.

• Extra outlays on the brand cannot be capitalised into an already existing brand as the outlays are generally to maintain the existing asset rather than increase the asset. Also, hard to distinguish the expenditure from that spent to develop the business as a whole.

• AASB 138 says that brands cannot be revalued as no active market exists.

• Can the outlay be related to the brand or is it internally generated goodwill: does it relate to the entity as a whole rather than a single asset? Cannot recognise internally generated goodwill.

• Expected result is that any outlays would need to be expensed.

3. Effects on financial statements:

• Liability? Provision?

• Contingent liability – notes only.

• Asset? No.

• Profit: expense relating to the guarantee provision?

Please help me analyze

Answer 1

1

• LIABILITY

Inorder to decide is there any liability is there or not,we need to consider following

  There are two requirements for contingent liability

> There is a likelihood of occurrence

> Measurement of the occurrence is classified as either estimatable or inestimatable

According to the FASB, if there is a probable liability determination before the preparation of financial statements has occurred, there is a likelihood of occurrence, and the liability must be disclosed and recognized. This financial recognition and disclosure are recognized in the current financial statements. The income statement and balance sheet are typically impacted by contingent liabilities

here in our case study the guarantee is given for environmental reputation, part of marketing strategy. This is like one of expense in day to day activities and which is helpful for the company as well. so rather than viewing it as contingent laibility, it is more of a expenditure nature.

• Since it is of expenditure nature we can view it not as a liability
• to be measured as per previous experiances
• it could be a contingent liablity but here it shows more of a revenue nature( expenditure)

2. AASB 138 INTANGIBLE ASSETS

If an intangible asset acquired in a business combination is separable or arises from contractual or other legal rights, sufficient information exists to measure reliably the fair value of the asset. When, for the estimates used to measure an intangible asset’s fair value, there is a range of possible outcomes with different probabilities, that uncertainty enters into the measurement of the asset’s fair value.One or more intangible assets may be acquired in exchange for a nonmonetary asset or assets, or a combination of monetary and nonmonetary assets. The following discussion refers simply to an exchange of one non-monetary asset for another, but it also applies to all exchanges described in the preceding sentence. The cost of such an intangible asset is measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable.

3.

LIABILITY

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

PROVISIONS

Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement.

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.