Takudzwa chapungu
Csm2002102
Ias38 homework
PART A - KONDI LTD
An intangible asset is a identifiable non-monetary asset without physical substance. An asset is a
resource that is controlled by the entity as a result of past events (for example, purchase of self-
creation) and from which future economic benefits (inflows of cash or other assets) are expected. The
jomo brand has no physical substance as it cant be touched, it is completely owned by kondi limited
and controlled by it as they reserve the right to sell or keep it. It was as a result of past events in the
context of research and development and economic benefits are expected to flow to kondi ltd through
sale of the washing powder so it can be classified as an intangible asset.
The recognition criteria of ias38 is that future economic benefits will flow to the business and the jomo
brand was valued at 20 million. The cost of the asset must be measured reliably in this case the cost
of jomo cannot be reliably.
As a results jomo does meet the criteriaof being an intangible asset.
Ias38 does not allow fair value to be used to value intangible assets so the accounting treatment was
wrong they should have used the cost.
Mr spark should remove the jomo brand from the financials as it does. We cannot classify as an asset
so it should not be under that heading.
Part B
An intangible asset iis a identifiable non-monetary asset without physical substance. An asset is a
resource that is controlled by the entity as a result of past events (for example, purchase of self-
creation) and from which future economic benefits (inflows of cash or other assets) are expected. The
casino license meets the definition of a an asset and it has a cost of of 15 million balued by experts so
its costs can be measured reliably.
P
As the government grant took the form of a non-monetary asset (i.e. casino licence intangible asset),
Zondi (Pvt) Ltd also has the alternative to initially account for both the asset and the grant at fair value.
The casino licence could thus be recognised initially as an intangible asset for $50 million with deferred
income being raised for $48.5 million ($50 million fair value – $15 million paid)
Amortisation
IAS 38.88 requires Zondi (Pvt) Ltd to assess whether the casino licence (intangible asset) has a finite
or indefinite useful life for the purpose of determining whether the asset is subject to amortisation or
not. The casino licence does have a finite useful life because it was awarded to Zondi (Pvt) Ltd for a
non renewal period of 25 years and should therefore be amortised over this useful life. As a result,
Zondi (Pvt) Ltd’s policy not to amortise the casino licence, despite it having a finite useful life, is in
contravention of IAS 38.89.
Although the amortisation charge for an intangible asset can be zero where the asset’s residual value
increases to an amount equal or greater than its carrying amount (IAS 38.103), the residual value of
Zondi (Pvt) Ltd’s casino licence is required to be assumed as zero as the exceptions provided in IAS
38.100 are not applicable.
There is neither:
• an active market (as defined by IAS 38) for casino licences in South Africa, nor (1)
• has Zondi (Pvt) Ltd secured a commitment from a third party (will sell to the highest bidder) for the
purchase of the casino licence at the end of its useful life (i.e. the period over which Zondi (Pvt) Ltd
expects to receive benefits from the licence).
An intangible asset is a identifiable non-monetary asset without physical substance. An asset is a
resource that is controlled by the entity as a result of past events (for example, purchase of self-
creation) and from which future economic benefits (inflows of cash or other assets) are expected.
With the residual value of the casino licence being assumed to be zero, Zondi (Pvt) Ltd cannot argue
that no amortisation must take place because the selling price of the casino licence is in excess of its
nominal cost.
As the casino licence is for a 25 year period it should be amortised over 25 years, commencing 2
January 20.15. The fact that it was brought into use only three months after acquisition (1 April 20.15)
is not relevant, as amortisation should commence when an intangible asset is available for its intended
use.
The amortisation method should reflect the pattern in which the asset’s future economic benefits are
expected to be consumed by Zondi (Pvt) Ltd. If that pattern cannot be determined reliably, the
straight-line method should be used.
The residual value, amortisation period and amortisation method of the casino licence should be
reviewed at least at each financial year-end, with any changes thereto to be accounted for as a change
in accounting estimate in accordance with IAS 8.
Impairment
Zondi (Pvt) Ltd should assess at each reporting date whether there is an indication that the casino
licence may be impaired (IAS 36.09). Only if such an indication exists, should the recoverable amount
of the casino licence be estimated with the carrying amount of the asset written down to its
recoverable. The write down should be recognised as an impairment loss.
Revaluation
Ms Zondi’s accounting for the revaluation (taking the increase in value to profit) amounts to fair value
accounting. Fair value accounting is not permitted in respect of intangible assets. Revaluations of
intangible assets is an allowed alternative accounting treatment of IAS 38.75 but may only be applied
where there is an active market for the intangible asset. South African casino licences are neither
homogenous nor traded in an open forum, accordingly they do not meet the IAS 38 active market
requirements, and hence cannot be revalued, after initial recognition.
The casino licence must therefore be accounted for, after initial recognition, by applying the cost
model.
The $48.5 million taken to income during the current year must be reversed.
