Reference no: EM132631208
West Ltd is a leading company in the sale of frozen and canned fish produce. These products are sold under two brand names. Fish caught in southern Australian waters are sold under the brand 'Antarctic Fresh', which is the brand the company developed when it commenced operations and which is still used today. Fish caught in the northern oceans are sold under the brand name 'Tropical Taste', the brand developed by Fishy Tales Ltd. West Ltd acquired all the assets and liabilities of Fishy Tales Ltd a number of years ago when it took over that company's operations.
West Ltd has always marketed itself as operating in an environmentally responsible manner, and is an advocate of sustainable fishing. The public regards it as a dolphinfriendly company as a result of its previous campaigns to ensure dolphins are not affected by tuna fishing. The marketing manager of West Ltd has noted the efforts of the ship, the Steve Irwin, to disrupt and hopefully stop the efforts of whalers in the southern oceans and the publicity that this has received. He has recommended to the board of directors that West Ltd strengthen its environmentally responsible image by guaranteeing to repair any damage caused to the Steve Irwin as a result of attempts to disrupt the whalers. He believes that this action will increase West Ltd's environmental reputation, adding to the company's goodwill. He has told the board that such a guarantee will have no effect on West Ltd's reported profitability. He has explained that, if any damage to the Steve Irwin occurs, West Ltd can capitalise the resulting repair costs to the carrying amounts of its brands, as such costs will have been incurred basically for marketing purposes. Accordingly, as the company's net asset position will increase, and there will be no effect on the statement of profit or loss and other comprehensive income, this will be a win-win situation for everyone.
Required
Problem 1: The chairman of the board knows that the marketing manager is very effective at selling ideas but knows very little about accounting. The chairman has, therefore, asked you to provide him with a report advising the board on how the proposal should be accounted for under accounting standards and how such a proposal would affect West Ltd's financial statements.