Reference no: EM132506682

Rika Ltd is an Australian company operate in delivery sector. Although the sector in Australia is growing slowly, Rika Ltd has reported significant increase in sales and net income in recent years compared to the competitors. While sales increased from $70 million in 2010 to $150 million in 2019, profit increased from $3.5 million to $13 million over the same period. The board of directors and investors believe that the company's future is very promising. In early 2020, the company was valued at $450 million, which was three times 2019 sales and 26 times estimated 2020 profit.

Rika's board of director focus significantly on developing product development and marketing strategies. For example, instead of competing on price, Rika Ltd prefers to focus on service and innovation, including:

1. free delivery
2. a free gift with orders over $250.

• As a result of such innovations, customers accept prices that are 50% above those of competitors, and Rika maintains a gross profit margin of around 40%.

• However, some investors have doubts about the company as they are uneasy about certain accounting policies the company has adopted. For example, Rika Ltd capitalises the costs of its direct mailings to prospective customers ($3.8 million at 30 June 2019) and amortises them on a straight-line basis over 3 years. This practice is considered to be questionable as there is no guarantee that customers will be obtained and retained from direct mailings.

• In addition to the mailing lists developed by in-house marketing staff, Rika Ltd purchased a customer list from a competitor for $900,000 on 10 August 2020. This list is also recognised as a non-current asset. Rika Ltd estimates that this list will generate sales for at least another 2 years, more likely another 3 years. The company also plans to add names, obtained from a phone survey conducted in August 2020, to the list. These extra names are expected to extend the list's useful life by another year.

• Rika Ltd's 2019 statement of financial position also reported $8 million of marketing costs as non-current assets. If the company had expensed marketing costs as incurred, 2019 net income would have been $11 million instead of the reported $13 million. The concerned investors are uneasy about this capitalisation of marketing costs, as they believe that Rika Ltd's marketing practices are relatively easy to replicate. However, Rika Ltd argues that its accounting is appropriate. Marketing costs 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.

Problem 1: Identify different costs listed in the case study and explain how Rika Ltd's costs should be accounted for under AASB 138/IAS 38 Intangible Assets, giving reasons for your answer.