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Snow Protek Ltd is a small company. Because of a successful research project the company expects rapid growth over the next five to ten years. As a reporting entity, Snow Protek Ltd is required to comply with all accounting standards.
As shown in the following extract from its draft Statement of financial position as at 30 June 2016 prepared by the company, Snow Protek Ltd has two separate classes of intangible assets:
Intangible Assets as at 30 June 2016:
Brand name (at directors’ valuation June 2013) $800,000
Research and development asset at cost $1,710,000
Snow Protek Ltd has provided the following additional details relating to each item.
Brand Name
In January 2013, Snow Protek Ltd purchased a successful brand of sun hats for $500,000. The hats, called Snowsafe, are specially designed for use in snowy conditions. Based on years of experience in the industry, Snow Protek Ltd’s Managing Director (MD) valued the brand name conservatively at 80% of its estimated value in use ($1,000,000) on 30 June 2013. The brand name has not been amortised because, as the MD says, “there is no telling just how long these hats will sell”. Over the last two years, numerous competing products have emerged under similar brand names and several of those brands have sold to new owners.
In the 2015-2016 financial year, Snow Protek Ltd spent $300,000 on advertising and marketing of its Snowsafe brand and sales have increased slightly. The MD wishes to increase the value of the brand name by $300,000 to $1,100,000 because any decline in sales has been avoided.
Research and Development
The research and development asset relates to two projects:
Project 1: Face Cream – Research and Development asset – $1,260,000
Project 1 is concerned with a new form of face cream that, within 1 minute of application, provides an effective barrier to wind burn for a period of 12 hours. There is great excitement about the potential of this product. Snow Protek Ltd is currently building production facilities for the new face cream and expects these facilities to be completed by 1 July 2016 at which time commercial production will commence. Further details on these costs are as follows.
Costs incurred by Snow Protek Ltd in previous accounting periods – $800,000
The prior periods’ costs included:
• $100,000 related to research on the effect of UV rays on various skin types;
• $200,000 was spent on investigating methods to increase the effective protection time of the face cream.
• $500,000 was spent on developing a face cream that could be easily applied and had a pleasing smell and texture.
ACCT3102 External Reporting – Semester 2, 2017
In the prior periods no market research was conducted but the MD of Snow Protek Ltd was confident of obtaining large sales in Australia and New Zealand.
Cost incurred by Snow Protek Ltd in the current accounting period (2015/2016) – $460,000
The $460,000 costs incurred during the current period relate to the successful development of techniques to produce the face cream in large, economically viable quantities. During the current period, an external consultant undertook the first market research of the face cream’s potential sales. The research results conclusively confirmed that there is a large, highly profitable market for the cream in both Australia and New Zealand.
Project 2: New Fabric – Research and Development asset – $450,000
Project 2 relates to the design of a new fabric for ski jackets that Snow Protek Ltd has been investigating for a number of years. Costs incurred in prior periods of $300,000 relate to research on different types of technologies potentially available to make a highly insulating but non-sweaty material. In the current period, an additional $150,000 has been incurred. However, due to economic constraints faced by the company, project 2 was abandoned on the 1 June 2016.
You represent the accounting firm advising Snow Protek Ltd as to its compliance with AASB 138 Intangible Assets. Comment on all matters relating to the past and current accounting treatment of the intangible assets described above, providing clear explanations to support your answers. This should include comment on the appropriate value of each intangible asset at 30 June 2016 based on the appropriate basis of measurement (cost model, revaluation model or recoverable amount) and discussion on amortization. Your discussion should include comments on any past accounting treatment described above that are not consistent with AASB 138, with the appropriate treatment that should have been adopted.
You recommendations should provide a clear explanation of:
a) how the accounts would need to be adjusted at 30 June 2016 to reflect your analysis and recommendations; and
b) the determination of the carrying amount of the intangible assets recognised in the Statement of financial position of Snow Protek Ltd as at 30 June 2016.
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