Question

Case (a) A Cement manufacturing organization incurred the following expenses during the year 2017.The establishment cost for a new business facility was amounted to OMR 45,000, the cost of formulas and prototype was OMR 76,000, The design of pilot plan was OMR 172,000, The television advertisement cost was OMR 25,000, Goodwill acquired from purchase combination was OMR 65,000, Operating rights cost was 36,000 During the year, in house accounting software was developed by the organization at a cost of OMR 120,000.

Case (b) A new product was developed during the year. The expenditure totaled OMR 4.5 million of which OMR 3 million was incurred prior to 30 November 2018 and on that date it became clear that the product was technically viable. The new product will be launched in the next four months and its recoverable amount is estimated at OMR 2,100,000.

Case (c) A customer list was prepared by marketing division and through that innovative marketing strategies have been developed. The estimated cost of preparation of customer list was OMR 900,000 out of which the actual cost incurred for this purpose was OMR 650,000. Because of this cost the company has earned incremental revenue of OMR 450,000.

Case (d) The Company has acquired a formula from an organization for production of one variety of products. The cost incurred on acquiring the formula was OMR 200,000. The new product with the formula was popularized and the increased profit to the business over the next two years would be OMR 325,000

Required:

On the role of an accountant, assess ALL the above cases and justify your answer for ALL the cases about the capitalization of assets and charging of expenses as per the requirement so IAS 38

Answer 1

As per IAS 38, an entity is required to recognise an intangible asset, whether purchased or self-created if there will be a flow of future economic benefits to the entity attributable to such asset and its cost can be measured reliably. If an intangible item does not meet the recognition criteria, in such a case, as per IAS 38, any expenditure is to be recognised as expense when incurred.

a) Establishment cost of OMR 45,000 - Expensed

Cost of formulas & prototype - Capitalized

Design of pilot plan of OMR 172,000 - Capitalized

Television advertisement of OMR 25,000 - Expensed

Goodwill acquired from purchase combination- Capitalized at OMR 65,000

Operating rights cost of OMR 36,000 - Capitalized

In-house accounting software of OMR 120,000 -Expensed

The expenditure which has been capitalized above is due to the following reasons-

1) They meet the criteria of identifiability i.e. they arise from contractual rights

2) It is probable that future economic benefits will flow to the entity.

3) Their costs can be measured reliably.

b) Expenditure amounting to OMR 3 million should be charged off as expense because it does not fulfil the above recognition criteria. However, the balance OMR 1.5 million expenditure should be capitalized as an intangible asset in the books because after 30 November, it was clear that the product was technically viable.

c) Actual cost incurred on preparing the customer lists should not be recognised as an intangible asset because these are internally generated which is as per IAS [38.63] even though the company has earned incremental revenues amounting to OMR 450,000.

d) Expenditure of OMR 200,000 incurred on acquiring formula for production of one variety of products should be capitalized as an intangible asset at a cost of OMR 200,000 due to the fulfilment of the recognition criteria.