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