Chapter 10 HKAS 38 Intangible Assets

1.      Objectives

1.1       Outline the problems relating to accounting for intangible assets (無形資產).
1.2       Comment on the controversy surrounding the treatment of intangibles.
1.3       Define research and development.
1.4       Describe the requirements of HKAS 38 in respect of research and development costs and the necessary disclosures.
1.5       Distinguish between internally generated goodwill and goodwill or negative goodwill arising on acquisition.
1.6       Explain the requirements of HKAS 38 and HKFRS 3 “Business Combinations” in respect of accounting for internally generated goodwill and goodwill or negative goodwill arising on acquisition.

2.      Introduction

2.1

DEFINITIONS

(a)       An intangible asset is an identifiable (可辨認) non-monetary asset without physical substance. It can be held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. (指企業為生產商品、提供勞務、出租給他人，或為管理目的而持有的、沒有實物形態的非貨幣性長期資產。) (b)       An active market is a market where all the following conditions exist: (i)        the items traded within the market are homogeneous (同類的); (ii)       willing buyers and sellers can normally be found at any time; and (iii)      prices are available to the public.

2.2       Examples of intangibles include:
(i)         Patents (專利權)
(ii)        Copyrights (e.g. computer software) (版權)
(iii)       Licences (特許)
(iv)       Intellectual property (知識產權), e.g. technical knowledge obtained from development activity
(v)        Trade marks (商標) including brand names and publishing titles
(vi)       Motion picture films and Video recordings
2.3       Before HKAS 38, GAAP gave guidance on recognition and measurement of intangible assets in specific cases but it had several shortcomings. These were:
(i)         a lack of a definition of intangible assets;
(ii)        a lack of general rules of recognition and measurement of intangible assets; and
(iii)       a lack of coherence in rules of accounting for those intangibles covered by the GAAP.
These weaknesses led to lack of comparability and allowed for creative accounting opportunities.
2.4       Problems relating to accounting for intangible assets:
(i)         high degree of uncertainty relating to the value of future benefits to be derived.
(ii)        difficult to identify specific revenues arising from the use of intangible assets.
(iii)       difficult to arise both in determining the cost of intangibles and in matching them with revenues earned in future periods.

3.      Recognition and Measurement

(A)       Overview of accounting treatment

3.1       Intangibles must meet strict recognition criteria before they can be recognised.
3.2       Initial measurement should be at cost.
3.3       After recognition, an entity must choose either the cost model or the revaluation model.
3.4       An intangible asset with a finite useful life must be amortised over that life. An intangible asset with an indefinite useful life is not amortised, but must be subjected to an annual impairment review.

(B)       Recognition

3.5	RECOGNITION CRITERIA
	The recognition criteria for an intangible asset are as follows: (i)         it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and (ii)        the cost of the asset can be measured reliably.

3.6       The above criteria apply whether an intangible asset is acquired externally or generated internally. For an intangible to be recognised, the following points should be further clarified.

(a)       Be identifiable

3.7       Intangible assets such as customer relationships cannot be separated from goodwill. In a business combination such assets would become part of goodwill, but they cannot be recognised by themselves. To be recognised the enterprise must be able to dispose of the intangible asset without disposing of any other assets at the same time.

(b)       Be controlled by the entity

3.8       One of the most valuable intangible assets is a trained and motivated work force. However, the enterprise cannot prevent its staff from leaving, and so the enterprise cannot control the future economic benefits expected to flow from its staff. Therefore, trained staff cannot be recognised as an intangible asset.
3.9       The knowledge that the staff is also an asset. It can be possible for the enterprise to control this knowledge. Patents, copyrights and restraint-of-trade agreements will give the enterprise legal rights to the future economic benefits and prevent other people from obtaining them. Therefore copyrights and patents can be capitalized.

(c)        Generate probable future economic benefits for the entity

3.10     This can happen in two ways. Owning a brand name can boost revenues, while owning the patent for a production process may help to reduce production costs. Either way, the enterprise’s profits will be increased.

(d)       Have a cost that can be measured reliably

3.11     If the asset is acquired separately then this is straightforward. For example, the purchase price of a franchise should be capitalized, along with all the related legal and professional costs.
3.12     If the asset is acquired as part of a business combination, then its cost will equal its fair value at the date of acquisition. The best measure of fair value is the quoted price of similar assets on an active market.

(e)       Internally generated intangible assets

3.13     HKAS 38 includes additional recognition criteria for internally generated intangible assets. It specifically provides that internally generated goodwill, brands, mastheads, publishing titles, customer lists and items similar in substance should not be recognized as intangible assets.
3.14     Expenditure on internally generated brands, mastheads (報頭), publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets. Furthermore, all expenditure on research or during the research phase of an internal project is to be written off as an expense when it is incurred.
3.15     Examples of other expenditure that will not give rise to an intangible asset that can be recognized in the financial statements include the following:
(i)         expenditure on starting up an operation or a business (start-up costs);
(ii)        expenditure on training;
(iii)       expenditure on advertising and/or promotion; and
(iv)       expenditure on relocating or re-organising part or all of an enterprise.
3.16     If an intangible item does not meet both the definition and the recognition criteria of an intangible asset, the expenditure on this item should be recognized as an expense when it is incurred.
(C)      Initial measurement

3.17     An intangible asset should be measured initially at cost.
3.18     The cost of an externally acquired intangible asset comprises its purchase price and any directly attributable expenditure on preparing the asset for its intended use.
3.19     For internally generated intangible asset, the cost is the sum of expenditure (materials, salary and wages, and directly attributable overhead) incurred from the day when the asset first meets the recognition criteria.

3.20

EXAMPLE 1

AB Ltd is developing a new production process. For the year ended 31 December 2008, expenditure incurred was $1,000,000, of which $900,000 was incurred before 1 November 2008 and $100,000 was incurred between 1 November 2008 and 31 December 2008. The enterprise was able to demonstrate that, at 1 November 2008, the production process met the criteria for recognition as an intangible asset. The recoverable amount of the know-how embodied in the process was estimated to be $250,000. The production process is recognized as an intangible asset in the 2008 balance sheet at a cost of $100,000 (expenditure incurred since the date when the recognition criteria were met, that was, 1 November 2008). The $900,000 expenditure incurred before 1 November 2008 was recognized as an expense because the recognition criteria were not met until 1 November 2005. To illustrate further, assume that for the year ended 31 December 2009, further expenditure of $2,000,000 is incurred. At 31 December 2009, the recoverable amount of the know-how embodied in the process was estimated to be $5,000,000. The cost of the production process is $2,100,000 ($100,000 expenditure recognized at the end of 2008 plus $2,000,000 expenditure recognized in 2009) at 31 December 2009.

(D)      Measurement subsequent to initial recognition

(a)       Cost model and revaluation model

3.21     Following initial recognition, an entity has a choice between measuring an intangible asset using the cost model and the revaluation model.

 

 

 

3.22

KEY POINTS

(a)        The cost model treatment for measurement after initial recognition is that intangible assets should be carried at cost less any accumulated amortisation and any accumulated impairment loss. (b)        The revaluation model is only permissible if a number of conditions are met: (i)         the fair value must be capable of being measured reliably by reference to an active market. (ii)        all intangibles of the same class must be revalued. (iii)       revaluations must be made sufficiently frequent to ensure that the carrying value at each balance sheet date does not differ materially from the fair value. (c)        The accounting for revaluation increase (decrease) is the same as that provided in HKAS 16 “Property, Plant and Equipment”.

(b)       Amortisation

3.23     An entity must assess whether the useful life of an intangible asset is finite or indefinite.

3.24

KEY POINTS

(a)       An asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows. (b)       An asset with a finite useful life must be amortised on a systematic basis over that life. The amortisation method used should reflect the pattern in which the asset’s economic benefits are consumed. If that pattern cannot be determined reliably, the straight-line method should be adopted. The amortisation charge should be recognized as an expense unless another HKAS or requires it to be included in the carrying amount of another asset. Normally the straight-line method with a zero residual value should be used. (c)       An asset with an indefinite useful life is not amortised. Instead an annual impairment review must be carried out to compare the carrying amount with the recoverable amount.

3.25     HKAS 38 further specifies that the residual value of an intangible asset is assumed to be zero unless:
(i)         there is a commitment by a third party to purchase the asset at the end of its useful life; or
(ii)        there is an active market for that type of asset, and residual value can be determined by reference to that market and it is probable that such a market will exist at the end of the asset’s useful life.
3.26     HKAS 38 requires the amortisation period and the amortisation method to be reviewed annually. Any change to the amortisation period and amortisation method should be accounted for as a change in an accounting estimate in accordance with HKAS 8.

3.27

EXAMPLE 2

Assume that DE Ltd has capitalized $12,000,000 as development costs as at 31 December 2001. DE Ltd expects the net profit from the sale of the new product developed to be approximately $15,000,000, of which 50% will be earned in 2002, 30% in 2003, and 20% in 2004. The development costs should be amortised in a manner such that $6,000,000 will be charged to the 2002 profit and loss account, $3,600,000 to the 2003 profit and loss account, and $2,400,000 to the 2004 profit and loss account.

(E)       Subsequent expenditure

3.28     Subsequent expenditure on an intangible asset after its purchase or completion should be recognized as an expense when it is incurred unless:
(i)         it is probable that this expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance; and
(ii)        the expenditure can be measured and attributed to the asset reliably.

If these conditions are met, the subsequent expenditure should be added to the cost of the asset.

(F)       Retirements and disposals

3.29     An intangible asset should be derecognised on disposal or when no future economic benefits are expected from its use and subsequent disposal. Gains and losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognized in the profit and loss account.

4.      Disclosure Requirements

4.1       The following should be disclosed for each class of intangible assets, classified between internally generated and other intangible assets.
(i)         Useful lives (or amortization rates).
(ii)        Amortisation methods.
(iii)       The line item(s) of the income statement in which the amortization of intangible assets is included.
(iv)       Movements in cost, amortization and carrying value for the year.
(v)        The reasons why an intangible asset is believed to have an indefinite useful life.
(vi)       Details of any individually material intangible asset.
(vii)      Carrying amounts of intangible assets with restricted title or that have been pledged as security.
(viii)     Amount of contractual commitments to acquire intangible assets.
4.2       The following should be disclosed for each class of asset that has been revalued.
(i)         Date of the revaluation.
(ii)        Revalued carrying amount.
(iii)       Historic cost carrying amount.
(iv)       Movement on the revaluation surplus.
(v)        Methods applied in estimating the fair values.

5.      Research and Development

(A)      Definitions

5.1	DEFINITION
	Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. (研究係指企業經由有計畫地探索或嚴格地調查，而發現能夠促進新產品（或服務）或新技術（生產程序）之發展，或能夠為現有產品或技術帶來重大改進之新知識。)

5.2       During research phase, an enterprise cannot demonstrate that an intangible asset exists that will generate probable future economic benefits during the research phase. Therefore, expenditure on research should be recognised as an expense when it is incurred.
5.3       Examples of research activities are:
(i)         activities aimed at obtaining new knowledge;
(ii)        the search for, evaluation and final selection of, applications of research findings or other knowledge;
(iii)       the search for alternatives for materials, devices, products, processes, systems or services; and
(iv)       the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or devices.

 

5.4	DEFINITION
	Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or use. (發展係指將研究結果轉化為新產品、新技術、新服務，或對現有產品、技術、服務有重大改進之具體計畫或設計。)

5.5       Examples of development activities are:
(i)         the design, construction and testing of pre-production or pre-use prototypes and models;
(ii)        the design of tools, jigs, moulds and dies involving new technology;
(iii)       the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and
(iv)       the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.

(B)       Classification of costs

5.6       Expenditure on research and development does not consist only of the salaries of scientists or the cost of test tubes. Many costs can properly be regarded as being incurred for research and development purposes. These include:
(i)         costs of materials;
(ii)        salaries; wages, and other employment costs of workers involved in research and development;
(iii)       depreciation of scientific and other equipment and land and buildings;
(iv)       a proportion of overhead costs;
(v)        related costs, such as patents, licence fees, etc.

(C)      Accounting problems

5.7       The problems in accounting for research and development revolve around two of the fundamental accounting concepts: accruals and prudence.
5.8       Research
Under the accruals concept, income is matched with the cost involved in generating that income. Yet how can expenditure on research be matched with any particular period’s income? There may be no direct benefit from the expenditure, or it may benefit many periods. Expenditure on research can, therefore, be regarded as part of the continuing cost of running the business. Since no one period can be expected to benefit more than another, such expenditure should be written off as incurred. Carrying expenditure forward to future periods would conflict not only with the accruals concept, but with prudent accounting practice,
5.9       Development expenditure
In the case of development expenditure, it is likely that future income, or cost reduction, can be directly attributable to a development project. An example of this is a motor car manufacturer who is developing a new model of car. He is incurring costs now in the expectation that they will be recovered from future sales of the car. On the accruals basis, such expenditure should not be written off against the current year’s income, but carried forward and set against income from the project in future years.

However, prudence dictates that it is impossible to determine whether future benefits will arise from a development project unless the project and its related expenditure are clearly identifiable. HKAS 38 therefore concludes that development expenditure should normally be written off as incurred, but should be carried forward in certain circumstances.

(D)      Requirements

5.10

KEY POINTS

(a)       Expenditure on research should be written off in the year of expenditure through the income statement. (b)       Expenditure on research should be written off in the year of expenditure except when the enterprise can demonstrate all of the following: (i)         the technical feasibility of completing the intangible asset (ii)        its intention to complete the intangible asset and use or sell it (iii)       its ability to use or sell the intangible asset (iv)       how the intangible asset will generate probable future economic benefits (v)        the availability of adequate resources to complete the development and to use or sell the intangible asset, and (vi)      its ability to measure the expenditure attributable to the intangible asset during its development reliably.

5.11     In the foregoing circumstances development expenditure should be deferred to the extent that its recovery can reasonably be regarded as assured.
5.12     Note that HKAS 38 requires development expenditure meeting all the above criteria to be capitalized.

(E)       Further problems with development expenditure

5.14     If development expenditure is deferred to future periods, three further problems arise:
(a)        How and when should the expenditure be written off?
(b)        What should be done if circumstances surrounding the project change?
(c)        How should development expenditure be shown in the balance sheet?

(a)       Writing off deferred development expenditure

5.15     The aim in carrying forward such expenditure is to match it against future benefits arising from the developed product. This can be in the form either of revenue from the sale of the product, or of reduced costs from improved production processes.
5.16     Deferred development expenditure should be matched against benefits in a sensible and consistent manner. It is not enough to write off the expenditure over an arbitrary number of years: writing off should start when the product begins to be produced commercially.

5.17

EXAMPLE 3

A company has deferred development expenditure of $600,000 relating to the development of New Miracle Brand X. It is expected that the demand for the product will stay at a high level for the next three years. Annual sales of 400,000, 300,000 and 200,000 units respectively are expected over this period. Brand X sells for $10. There are two possibilities for writing off the development expenditure: (a)    in equal instalments over the three year period, i.e., $200,000 pa; or (b)    in relation to total sales expected (900,000 units):     $ Year 1  = 266,667 Year 2  = 200,000 Year 3  = 133,333

 

(b)       Changing circumstances

5.18     Development expenditure may only be carried forward if there is a reasonable chance of setting it against income in the future, i.e., if the conditions mentioned above are met. If circumstances change, it may be necessary to write off the expenditure at once, on the basis of prudent accounting.
5.19     This can occur in a number of situations, including:
(i)         the arrival of possible competing products;
(ii)        changes in the general economic climate;
(iii)       changes in legislation, such as consumer or environmental changes.
5.20     If brought forward development expenditure is written off, it should not be regarded as a charge against prior years’ profits.
5.21     Deferred development expenditure should be reviewed at the end of each accounting period and where the circumstances which have justified the deferral of the expenditure no longer apply, or are considered doubtful, the expenditure, to the extent to which it is considered to be irrecoverable, should be written off immediately project by project.

(c)        Disclosure

5.22     In addition to the general disclosure requirements for intangible assets described earlier, an enterprise should also disclose the aggregate amount of research and development expenditure charged as an expense during the period.
5.23     Conclusion:
Expenditure on research projects must be written off as it is incurred. Expenditure on development is normally also written off as it is incurred, but must be capitalized if certain criteria are satisfied.

6.      Computer Intangibles

(A)       Computer software

6.1       Some computer software is an integral part of the related hardware, for example, the computer programme in a production-line robot or the operating system on a PC. The hardware will not work without the software, and so the software will be capitalized as part of the hardware. This will be a tangible non-current asset subject to HKAS 16.
6.2       Stand-alone computer software (for example an accounts package) is an intangible asset subject to HKAS 38.

(B)       HKAS-INT – 32: Website costs

6.3       The cost of developing a corporate website may be capitalized if it meets the requirements of HKAS 38 for internally generated assets. In particular the website must generate probable economic benefits. Following on from this, the costs of developing a website that is merely part of the company’s general advertising and marketing strategy cannot be capitalized. However, a website that will take customer orders will generate future revenues and can be capitalized.

7.      Goodwill (商譽)

(A)      Definitions

7.1

DEFINITIONS

(a)       Goodwill is the difference the value of a business as a whole and the aggregate of the fair value of its separable net assets. (b)       Separable net assets are those assets (and liabilities) which can be identified and sold off separately with necessarily disposing of the business as a whole. They include identifiable intangibles such as patents, licences and trademarks. (c)       Fair value is the amount at which an asset or liability could be exchanged in an arm’s length transaction between informed and willing parties, other than in a forced or liquidation sale.

(B)       Goodwill arising on acquisition

(a)       Nature, recognition and measurement

7.2       Goodwill arising on acquisition (or goodwill) is the excess of the cost of the acquisition over the acquirer’s interest in the fair values of the identifiable assets and liabilities acquired at the date of acquisition.
7.3       Goodwill should be recognized as an asset and carried at cost less any accumulated amortisation and accumulated impairment losses.
7.4       Goodwill represents a payment made by the acquirer in anticipation of future economic benefits. It is intangible, intrinsic to the business and incapable of being realized separate from the business as a whole.
7.5       Other characteristics of goodwill may include the following:
(i)         the value of goodwill has no reliable or predictable relationship to any costs which may have been incurred in its creation;
(ii)        individual intangible factors which may contribute to goodwill cannot be valued;
(iii)       the value of goodwill may fluctuate widely according to internal and external circumstances over relatively short periods of time; and
(iv)       the assessment of the value of goodwill may be highly subjective.
7.6       Goodwill exists in any successful business. However, if the business has never changed hands this goodwill will not be recognized in the financial statements because no event has occurred to identify its value. It can only be subjectively estimated. This is inherent goodwill.
7.7       Of course, a business which has acquired another and thus purchased goodwill, may then build up inherent goodwill of its own, but only the former will be reflected in the financial statements.

7.8

EXAMPLE 4

Fruit Ltd acquired all the net assets of Veg Ltd on 27 October 2004 by paying $400,000 in cash and issuing 50,000 of its $10 ordinary shares (market value of $20 each). The assets and liabilities of Veg Ltd on the date of acquisition were as follows:   Book value Fair value   $000 $000 Assets     Land and buildings 350 600 Plant and equipment 250 400 Cash 50 50 Trade debtors 150 140 Inventories 200 250   1,000 1,440       Liabilities     Trade creditors 250 240 Net assets 750 1,200 The journal entry to record the cost of acquisition in the books of Fruit Ltd would appear as follows:   Dr. ($000) Cr. ($000) Investment in Veg Ltd 1,400   Cash   400 Ordinary shares   500 Share premium   500 To record the cost of acquisition in Veg Ltd.     The consolidation journal entry to record the identifiable assets and liabilities acquired and the resulting goodwill would be:   Dr. ($000) Cr. ($000) Land and buildings 600   Plant and equipment 400   Cash 50   Trade debtors 140   Inventories 250   Goodwill 200   Trade creditors   240 Investment in Veg Ltd   1,400 To assign the cost of acquisition to identifiable assets and liabilities acquired at their fair values, giving rise to goodwill arising on acquisition.

 

(b)       Accounting treatment – positive goodwill

7.9       Initial recognition – positive goodwill will be recognised as a non-current asset at cost.
7.10     Subsequent measurement – goodwill is carried at cost less accumulated impairment losses.
7.11     HKFRS 3 “Business Combinations” requires that positive purchased goodwill must be tested annually impairment, and written down as necessary in accordance with HKAS 36 “Impairment of Assets”. No amortization should be charged.

(c)        Accounting treatment – negative goodwill

7.12     Sometimes, the cost of acquisition is less than the fair value of the net assets acquired. This is negative goodwill. It sometimes arises because of a forced sale at below market price.
7.13     Before negative goodwill is recognised, the fair value of the net assets acquired should be reviewed to ensure that they have not been overstated.
7.16     Once this check has been carried out, any remaining negative goodwill should be recognised immediately in the income statement.

Examination Style Questions

Question 1
Product development costs are a material cost for many companies. They are either written off as an expense or capitalised as an asset.

Required:

(a)     Discuss the conceptual issues involved and the definition of an asset that may be applied in determining whether development expenditure should be treated as an expense or an asset. (4 marks)
(b)     Emerald has had a policy of writing off development expenditure to the income statement as it was incurred. In preparing its financial statements for the year ended 30 September 2007 it has become aware that, under HKFRS rules, qualifying development expenditure should be treated as an intangible asset. Below is the qualifying development expenditure for Emerald:

	$000
Year ended 30 September 2004	300
Year ended 30 September 2005	240
Year ended 30 September 2006	800
Year ended 30 September 2007	400

All capitalised development expenditure is deemed to have a four year life. Assume amortisation commences at the beginning of the accounting period following capitalisation. Emerald had no development expenditure before that for the year ended 30 September 2004.

Required:

Treating the above as the correction of an error in applying an accounting policy, calculate the amounts which should appear in the income statement and balance sheet (including comparative figures), and statement of changes in equity of Emerald in respect of the development expenditure for the year ended 30 September 2007.

Note: ignore taxation.                                                                                           (6 marks)
(ACCA F7 Financial Reporting December 2007 Q5)

 

Question 2
(a)      During the last decade it has not been unusual for the premium paid to acquire control of a business to be greater than the fair value of its tangible net assets. This increase in the relative statement of financial position proportions of intangible assets has made the accounting practices for them all the more important. During the same period many companies have spent a great deal of money internally developing new intangible assets such as software and brands. Hong Kong HKAS 38 ‘Intangible Assets’ was issued in August 2004 and prescribes the accounting treatment for intangible assets.

Required:

In accordance with HKAS 38, discuss whether intangible assets should be recognised, and if so how they should be initially recorded and subsequently amortised in the following circumstances:

• when they are purchased separately from other assets;
• when they are obtained as part of acquiring the whole of a business; and
• when they are developed internally.                                                            (10 marks)

 

Note: your answer should consider goodwill in accordance with HKFRS 3 ‘Business Combinations’ separately from other intangibles.

(b)      Dexterity is a public listed company. It has been considering the accounting treatment of its intangible assets and has asked for your opinion on how the matters below should be treated in its financial statements for the year to 31 March 2004.

(i)       On 1 October 2003 Dexterity acquired Temerity, a small company that specialises in pharmaceutical drug research and development. The purchase consideration was by way of a share exchange and valued at $35 million. The fair value of Temerity’s net assets was $15 million (excluding any items referred to below). Temerity owns a patent for an established successful drug that has a remaining life of 8 years. A firm of specialist advisors, Leadbrand, has estimated the current value of this patent to be $10 million, however the company is awaiting the outcome of clinical trials where the drug has been tested to treat a different illness. If the trials are successful, the value of the drug is then estimated to be $15 million. Also included in the company’s statement of financial position is $2 million for medical research that has been conducted on behalf of a client.
(4 marks)
(ii)      Dexterity has developed and patented a new drug which has been approved for clinical use. The costs of developing the drug were $12 million. Based on early assessments of its sales success, Leadbrand have estimated its market value at $20 million.                     (3 marks)
(iii)     Dexterity’s manufacturing facilities have recently received a favourable inspection by government medical scientists. As a result of this the company has been granted an exclusive five-year licence to manufacture and distribute a new vaccine. Although the licence had no direct cost to Dexterity, its directors feel its granting is a reflection of the company’s standing and have asked Leadbrand to value the licence. Accordingly they have placed a value of $10 million on it.
(3 marks)
(iv)     In the current accounting period, Dexterity has spent $3 million sending its staff on specialist training courses. Whilst these courses have been expensive, they have led to a marked improvement in production quality and staff now need less supervision. This in turn has led to an increase in revenue and cost reductions. The directors of Dexterity believe these benefits will continue for at least three years and wish to treat the training costs as an asset. (2 marks)
(v)      In December 2003, Dexterity paid $5 million for a television advertising campaign for its products that will run for 6 months from 1 January 2004 to 30 June 2004. The directors believe that increased sales as a result of the publicity will continue for two years from the start of the advertisements.                                                                                         (3 marks)

Required:

Explain how the directors of Dexterity should treat the above items in the financial statements for the year to 31 March 2004.                                                                  (15 marks as indicated)

Note: The values given by Leadbrand can be taken as being reliable measurements. You are not required to consider depreciation aspects.
(Total 25 marks)
(Adapted ACCA Paper 2.5 (HKG) Financial Reporting June 2004 Q3)