Reference no: EM132519284

Mags ltd is an Australian mail order company. Although the sectors in Australia is growing slowly, Mags ltd has reported significant increase in the sales and net income in recent years while sales increased from $ 50 million in 2009 to $120 million in 2018 , profit increased from $ 3 million to $12 million over the same period. The stock market and analysts believe that company future is very promising. In early 2019 the company was valued at $350 million which was three times 2018 sales and 26 times estimated 2019 profit.

• Company management and may investors attribute the company success to its marketing flair and expertise. Instead of competing on price, Mags ltd prefers to focus on service and innovation,

Free delivery

A free gift with orders over $200 as a result of such innovation customers accept price that are 60% above those of competitors and Mags maintains a gross profit margin of around 40 % .

• Nevertheless some investors have doubts about the company as they are uneasy certain accounting policies the company has adopted . For example Mags ltd capitalises the costs of its direct mailings to prospective customers ( 4.2 million at 30 june 2018) and amortises them on a straight line basis over 3 years. This practise is considered to be questionable as there is no guarantee that customers will be obtained and retained from direct mailings.

• In additional to the mailing lists developed by in house marketing staff Mags ltd purchased a customer list from a competitor for $800000 on 4 july 2019 . This list also recognised as a non current asset. Mags ltd estimates that this list will generate sales for least another 2 years more likely another 3 years. The company also plain to add names obtained from a phone survey conducted in august 2019 , to the list. These extra names are expected to extend that list useful life by another year.

• Mags ltf 2018 statement of financial position also reported $7.5 million of marketing costs as non current assests . If the company has expensed marketing costs as incurred , 2018 net income would have been $ 10 million instead of the reported $12 million . The concerned investors are uneasy about this capitalisation of marketing costs as they believe that mags ltd marketing practices are relatively easy to replicate . However Mags argues that it is accounting appropriate. Marketing cost are amortised at an accelerated rate ( 55% in year 1 29% in year 2 , and 16% in year 3 ) based on 25 years knowledge and experience of customer purchasing behaviour

Required :

Question 1: the requirements under AASB 138 / IAS 38 Intangible assets how Mag ltd should account for the costs. provide reason for your answer in reference to relevant paragraphs of AASB 138 / IAS 38

Question 2: Explain in details about the above case of mags Ltd with valid conclusion