Innovate Company

Ten years ago, Innovate developed a new game called Our Sports. This game sold
over 10 million
copies around the world and was extremely profitable. Due to its popularity, Innovat
e release a new
game in the Our Sports series every year. The games continue to be bestsellers. Th
e directors have produced cash flow projections for the Our Sports series over the n
ext five years. Based on these
projections, they have prudently valued the Our Sports brand at $20 million and wis
h to recognise this in the statement of financial position as at 30 September 20X3.
On 30 September 20X3, Innovate also
paid $1 million for the rights to the Pets & Me videogame series after the original d
eveloper went into administration.
Required:
Discuss the accounting treatment of the above in the financial statements of
Innovate for the year ended 30 September 20X3.
HEYWOOD
The problems of identifying and valuing intangible assets with a view to recognising
them on the statement of financial position has been an area of inconsistent
practice that has led to great debate within the accountancy profession. IAS 38
Intangible Assets was issued in order to try and eliminate these inconsistent
practices.
Required:
(a) Discuss the recognition and initial measurement criteria for intangible assets
contained in IAS 38.
(9 marks)
(b) On the same date, but as a separate purchase to that of Fast Trak, Heywood
acquired Steamdays, a company that operates a scenic railway along the coast of a
popular tourist area. The summarised statement of financial position at fair values
of Steamdays on 1 July 2012, reflecting the terms of the acquisition was:
$000
Goodwill

200

Operating licence

1,200

Property train stations and land

300

Rail track and coaches

300

Steam engines (2)

1,000

Purchase consideration

3,000

The operating licence is for ten years. It has recently been renewed by the
transport authority and is stated at the cost of its renewal. The carrying amounts of
the property and rail track and coaches are based on their estimated replacement
cost. The carrying amount of the engines closely equates to their fair value less any
disposal costs.
On 1 August 2012 the boiler of one of the steam engines exploded, completely
destroying the whole engine. Fortunately no one was injured, but the engine was
beyond repair. Due to its age a replacement could not be obtained. Because of the
reduced passenger capacity the estimated value in use of the business after the
accident was assessed at $2 million.
Passenger numbers after the accident were below expectations even after allowing
for the reduced capacity. A market research report concluded that tourists were not
using the railway because of the fear of a similar accident occurring to the
remaining engine. In the light of this the value in use of the business was reassessed on 30 September 2012 at $18 million. On this date Heywood received an
offer of $900,000 in respect of the operating licence (it is transferable).
Required:
Briefly describe the basis in IAS 36 Impairment of Assets for allocating impairment
losses; and show how each of the assets of Steamdays would be valued at 1 August
2012 and 30 September 2012 after recognising the impairment losses.
(8 marks)

DEFER LLC
Your client, a limited liability company, wishes to defer expenditure on development
activities where possible and for as long as possible. The finance director has asked
for your advice on the procedures to set up in order to identify relevant expenditure
and comply with best accounting practice.
Required:

Draft the contents of a letter to the finance director of the company which
addresses his concerns.
(10 marks)

STARSKY
It is a general application of the concept of prudence that the carrying amount of an
asset should not be greater than the amount of cash that it will generate. IAS 36
Impairment of Assets gives guidance on the application of this principle in particular
to non-current assets. Under the rules in IAS 36 an asset must be written down to
its recoverable amount when this is less than its carrying amount. The standard
ensures that impairment loss is measured and recognised on a consistent basis.
Required:
(a) Explain the need for IAS 36.
marks)

(4

(b) Define and explain the concept of recoverable amount contained within IAS 36.
(4 marks)
(8 marks)