Reference no: EM133505550
Question: You are a senior accountant in a medium-sized accounting firm. Your client Casuarina Pty Ltd, a company that specialises in new inventions using the latest technology, has prepared a draft set of financial statements for the year ended 30 June 2035 and has included the following amount on the balance sheet:
Intangible assets
2035: 1,924,000
2034: 0
The client provided further details regarding the intangible assets as follows:
1. Patent AB1234- $361,000
2. Brand name- $750,000
3. Research and development costs- $813,000
Total intangible assets- $1,924,000
You and your manager met with the owner of Casuarina Pty Ltd to discuss the intangible assets capitalised during the year.
1. Patent AB1234 was acquired on 1 April 2035 for $270,000 from a third party. Legal costs incurred in securing the patent amounted to $23,000. Expenses incurred to train staff concerning the new product amounted to $68,000. The patent is expected to have a useful life of five years, with benefits expected to be received evenly during this time.
2. The brand name was acquired on 1 July 2034 as part of a business combination. The company has elected to use the revaluation model for the brand name. The brand name's fair value on the acquisition date was $500,000. On 30 June 2035, the owner estimated that the fair value of the brand name would be $750,000. The useful life of the brand name is indefinite.
3. Research and development costs were incurred during the year as the company continued researching and developing new inventions. The research and development costs were incurred as follows:
Project A - a new project commencing this year. $100,000 was spent during the year searching for alternative materials to use in a new product.
Project B - a continuing project which commenced last year. $313,000 was spent in the previous year on applied research designing a new product. Based on the work completed in 2034, Project B has progressed from the research stage and is in the development stage. In 2035 $400,000 was spent on constructing a pilot plant. As Project B is technically feasible and a large market exists for the new product, the owner is capitalising on all expenses concerning this project, given the deferred costs are expected to be recovered beyond a reasonable doubt.
4. The owner is also concerned that the balance sheet does not currently reflect the actual value of the business as the internally generated goodwill and customer list are presently not recorded on the balance sheet. The owner is looking to sell the company soon and is concerned that the balance sheet does not provide a true reflection of the company's value.
Following this discussion, understand your client's confusion regarding intangible assets. Your manager has asked to make a business letter to provide the client with accounting advice regarding the accounting treatment of intangible assets. A draft business letter is to be addressed to the client (make up a name for the client) but would be signed off by the partner of the firm (make up a name for the partner of your firm).
Required:
Business letter for the client to outline the accounting treatment and disclosure requirements concerning intangible assets. Support accounting advice concerning the relevant paragraphs of the accounting standards. Outline if the client is aware of any changes to the accounting treatment of applied research. A significant purpose of the business letter is to 'educate' the client to understand better intangibles assets, business combinations and the meaning and purpose of the balance sheet.