Question

In: Accounting

Ken owns and runs a high quality Japanese restaurant in the central district of Kuala Lumpur....

Ken owns and runs a high quality Japanese restaurant in the central district of Kuala Lumpur. He has received a number of offers from potential buyers but is not sure of the price he wants to sell it for.

The value of the business including land and buildings which is worth $2.5 million and the value of restaurant and kitchen fittings is worth $700,000. However, Ken feels that his restaurant is worth more than this. He has many loyal and regular customers and more importantly, he has two excellent chefs who have won awards on Masterchef. Added to this, his waiters and waitresses are well trained and highly regarded. All these factors have contributed to the restaurant receiving glowing reports in the magazines and newspaper.

After many rounds of negotiations, Ken decides to sell his restaurant to Jasmine at $4 million, with an additional value of RM800,000 paid over its tangible assets.

By referring to the DEFINITION and RECOGNITION criteria of Assets outlined in the Conceptual framework, should this additional value of RM800,000 to be recorded in Jasmine’s balance sheet?

Solutions

Expert Solution

ASSETS:
Those resources that are owned or controlled by a business enterprise, through which Future Economic Benefits are probable for the organisation are known as Assets. In simple words, assets involve the initial outflow of resources from the organisation, the benefit from which will be derived in more than one accounting year.

INTANGIBLE ASSETS:
These are those Assets that lack any physical substance and can’t be touched, seen or stored, unlike the Tangible ones. Assets like Trademark, Copyright, Patent, Goodwill etc are intangible assets.

RECOGNITION CRITERIA:

An Asset can be recognised if-
a) There is an expectation that Future Economic Benefits will flow into the organisation and,
b) The Cost can be measured reliably.


FACTS OF THE CASE:
In the given case,
Ken decides to sell his Japanese restaurant to Jasmine at $4 million, with an additional value of RM800,000 paid over its tangible assets. Ken’s restaurant already has, a good and loyal customer base and the chefs as well as the waiters and waitresses are well trained and highly regarded. Ken’s restaurant has also been glowing in the reports of newspapers and magazines.

SOLUTION:

  • As Ken has decided to sell his restaurant to Jasmine at a value, above the price of the tangible assets, it is due to the fact that his restaurant enjoys “Goodwill”.
  • He already has a loyal customer base, which is why Jasmine won’t face any problem in marketing the restaurant, as it is already known and the future revenue is already anticipated, to be equal to or greater than the past revenue earned by Ken.
  • It is due to the Goodwill of Ken’s restaurant, that Jasmine is ready to pay a price above the value of the business.

As per IAS-38, Intangible Assets, these can be recognised when;
a) The Future economic benefits are expected to flow to the organisation, whether the Intangible asset is self created or purchased and,
b) The cost can be measured reliably.

  • Both these conditions are satisfied, as Future economic benefits in the form of revenue, are sure to reach because of the loyal customer base enjoyed by Ken’s restaurant, without much effort, which would not have been the case, if Jasmine would have started her own restaurant.
  • Also, the cost has been measured as RM800,000 which is over and above its tangible assets, signifying Goodwill.

Therefore, this additional value of RM8,00,000 will be recorded in Jasmine’s Balance Sheet, under the head Intangible Assets, as “Goodwill”.


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