Singapore Institute of Management

UOL International Programme

AC2091 Financial Reporting
Session 11: Intangible Non-Current Assets & Impairment of Assets

Practice Questions

Question 1: Goodwill

What is goodwill? Discuss the reasons why it has been difficult to account for goodwill.
Outline three different methods for accounting for goodwill, showing how goodwill
would be accounted for in the financial statements for each of the methods and critically
assess each of the methods.
(UOL 2013 ZA Q6)

Question 2: Goodwill

Define goodwill and discuss the accounting concepts used to determine the accounting
treatment of goodwill. Compare and contrast SSAP 22 on goodwill with IAS 38 on
intangibles as it relates to goodwill and critically assess these standards.

(UOL 2012 ZA Q7)

Question 3: Goodwill

Discuss the issues in accounting for goodwill and critically assess an accounting standard
in this area.

(UOL 2010 ZA Q6)

Question 4: Goodwill

Sun Ltd acquired Mars Ltd on 1 July 2009 for the sum of $100,000. On the same date
Mars Ltd has the following assets and liabilities:

Carrying amount Recoverable amount Fair value

Assets:
Land 100,000 130,000 150,000
Machinery 50,000 30,000 40,000
Cash 20,000
Liabilities:
Loan 105,000
Contingent liabilities 80,000

What is the value of goodwill, if any?

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Question 5: R&D Costs

What is research and development? Discuss the main provisions of IAS 38 as it relates to
research and development. Discuss the application of accounting concepts to the
treatment of research and development and discuss the impact this has on financial
statements.
(UOL 2014 ZA Q6)

Question 6: R&D Costs

A company had $20 million of capitalised development expenditure at cost brought

forward at 1 October 20X7 in respect of products currently in production and a new
project began on the same date.

The research stage of the new project lasted until 31 December 20X7 and incurred $1.4
million of costs. From that date the project occurred development costs of $800,000 per
month. On 1 April 20X8 the directors became confident that the project would be
successful and yield a profit well in excess of costs. The project was still in development
at 30 September 20X8. Capitalised development expenditure is amortised at 20% per
annum using the straight line method.

What amount will be charged to profit or loss for the year ended 30 September 20X8 in
respect of research and development costs?

Question 7: R&D Costs

Technology Ltd entered into the following research and development expenditure in
2010:

▪ Research (pure and applied) £600,000

▪ Development £700,000

The development costs relate to a project to develop a new product. The project is
expected to be successful, leading to a new product which will generate substantial
revenues for the company. The company has enough resources to fund the project. Staff
costs of £400,000 have been incurred on the project during 2010. In addition capital
expenditure of £300,000 has been incurred during 2010. The capital expenditure relates
to the acquisition of equipment for final tests on the product and is depreciated using the
straight line method. The equipment has a useful economic life of 3 years and is then
expected to have no residual value.

Required:

Show how the research and development costs will be treated in the financial statements
of Technology Ltd in 2010.
(UOL 2011 ZB Q5d)

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Question 8: R&D Costs

Discuss the accounting treatment of research and development and critically assess an
accounting standard in this area.
(UOL 2008 ZA Q7)

Question 9: Intangible Assets

Discuss the accounting treatment of intangible assets and critically assess the accounting
standards in this area.
(UOL 2007 ZB Q7)

Question 10: Intangible Assets

Dexterity is a public listed company. It has been considering the accounting treatment of
its intangible assets and has asked for your opinion on how the matters below should be
treated in its financial statements for the year to 31 March 20X4.

(i) On 1 October 20X3, Dexterity acquired Temerity, a small company that

specialises in pharmaceutical drug research and development. The purchase
consideration was by way of a share exchange and valued at $35 million. The fair
value of Temerity’s net assets was $15 million (excluding any items referred to
below). Temerity owns a patent for an established successful drug that has a
remaining life of eight years. A firm of specialist advisors, Leadbrand, has
estimated the current value of this patent to be $10 million, however the company
is awaiting the outcome of clinical trials where the drug has been tested to treat a
different illness. If the trials are successful, the value of the drug is then estimated
to be $15 million. Also included in the company’s statement of financial position
is $2 million for medical research that has been conducted on behalf of a client.

(ii) Dexterity has developed a patented a new drug which has been approved for
clinical use. The costs of developing the drug were $12 million. Based on early
assessments of its sales success, Leadbrand have estimated its market value at $20
million.

(iii) Dexterity’s manufacturing facilities have recently received a favourable

inspection by government medical scientists. As a result of this the company has
been granted an exclusive five-year license to manufacture and distribute a new
vaccine. Although the license had no direct cost to Dexterity, its directors feel its
granting is a reflection of the company’s standing and have asked Leadbrand to
value the licence. Accordingly, they have placed a value of $10 million on it.
(iv) In December 20X3, Dexterity paid $5 million for a television advertising
campaign for its products that will run for 6 months from 1 January 20X4 to 30
June 20X4. The directors believe that increased sales as a result of the publicity
will continue for two years from the start of the advertisements.

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Required:

Explain how the directors of Dexterity should treat the above items in the financial
statements for the year to 31 March 20X4. [Note: Values given by Leadbrand can be
taken as reliable measurements. You are not required to consider depreciation aspects.]

(Adapted: ACCA Jun 2004)

Question 11: Impairment of Assets

An equipment has a carrying amount of $85,000 as at 31 March 20X9. Its market value is
$78,000 and costs of disposal are estimated at $2,500. A new equipment can be
purchased at $150,000. The company which owns the equipment expects it to generate
net cash flows of $30,000 per annum for the next three years. The company has a cost of
capital of 8%.

What is the impairment loss on the equipment to be recognised in the financial statements
as at 31 March 20x9?

Question 12: Impairment of Assets – Cash Generating Unit

A cash-generating unit comprises the following assets:

$’000
Building 700
Plant and equipment 200
Goodwill 90
Current assets 20
1,010

One of the machines, carried at $40,000, is damaged and will have to be scrapped. The
recoverable amount of the cash-generating unit is estimated at $750,000. What will be the
carrying amount of the building when the impairment loss has been recognised (to the
nearest $’000)?

Question 13: Impairment of Assets

Telepath acquired an item of plant at a cost of $800,000 on 1 April 20X0 that is used to
produce and package pharmaceutical pills. The plant had an estimated residual value of
$50,000 and an estimated life of five years, neither of which has changed. Telepath uses
straight-line depreciation.

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On 31 March 20X2, Telepath was informed by a major customer (who buys products
produced by the plant) that it would no longer be placing orders with Telepath. Even
before this information was known, Telepath had been having difficulty finding work for
this plant. It now estimates that net cash inflows earned from the plant for the next three
years will be:

$’000
Year ended: 31 March 20X3 220
31 March 20X4 180
31 March 20X5 170

On 31 March 20X5, the plant is still expected to be sold for its estimated realisable value.
Telepath has confirmed that there is no market in which to sell the plant at 31 March
20X2. Telepath’s cost of capital is 10% and the following values should be used:

Value of $1 at: $
End of year 1 0.91
End of year 2 0.83
End of year 3 0.75

Telepath owned a 100% subsidiary, Tilda, which is treated as a cash generating unit. On
31 March 20X2, there was an industrial accident (a gas explosion) that caused damage to
some of Tilda’s plant. The assets of Tilda immediately before the accident were:

$’000
Goodwill 1,800
Patent 1,200
Factory building 4,000
Plant 3,500
Receivables and cash 1,500
12,000

As a result of the accident, the recoverable amount of Tilda is $6.7 million. The explosion
destroyed (to the point of no further use) an item of plant that had a carrying amount of
$500,000.

Tilda has an open offer from a competitor of $1 million for its patent. The receivables
and cash are already stated at their fair values less costs to sell (net realisable values).

Required:
Calculate the carrying amounts of the plant and assets in the subsidiary above at 31
March 20X2 after applying any impairment losses. [Calculations should be to the nearest
$1,000.]

(Adapted: ACCA Jun 2012)