Sasha Whitmore is the new owner of a catering establishment acquired on 1 July 2011, from Sunshine
Question:
Sasha Whitmore is the new owner of a catering establishment acquired on 1 July 2011, from Sunshine Caterers (SS). She seeks your advice on whether she could report the following resources as assets in her financial statements:
(a) She obtained from SS a list of customers who have remained regulars for over a decade and their total custom has usually been worth in excess of £12 million per year.
(b) Catering contracts to local hospitals, awarded to SS by the National Health Trust and reported in the books of SS at £500, have been transferred to Sasha. It is not certain whether Sasha will be in a position to sell, assign or transfer these contracts, if necessity arises, nor whether the contracts will be renewed when the current awards expire on 30 June 2015.
(c) A logo and the brand name used by SS are very well known and are a significant reason for winning catering contracts. Neither the logo nor the brand name had been reported in the books of SS. Sasha feels that the brand name should have a market appeal for at least 20 more years and that, in the circumstances, she would have been willing to pay £400,000 to take over the logo together with its brand name.
(d) As a way of cultivating customer loyalty Sasha sent lavish Christmas hampers to all the customers in the list referred to in (a) above, at a cost of £540,000.
(e) The staff at SS are privy to a secret process which kept food warm over several hours without loss of flavour or taste. Since the SS staff are continuing in her employ, Sasha is of the opionion that a value of £200,000 can be placed on this secret process.
Required:
How would you advise Sasha?
Step by Step Answer:
All of the resources referred to by Sasha are intangible assets no physical substance and other than goodwill What needs to be considered on deciding whether these can be capitalised are i whether they are identifiable and ii whether they meet the capitalisation criteria a The list of customers is not identifiable because it cannot be sold assigned or transferred without selling the whole business as a going concern Besides Sasha would not have control over future custom nor will she be assured that future economic benefit will flow from that list Sasha has no way of having control over or protecting the loyalty of the customers on the list Hence this resource cannot be capitalised b The catering contracts to hospitals are governmentgranted intangibles They are identifiable assets although they may not be separable ie to sell assign or transfer because they arise from a contract They meet the capitalisation criteria because the economic benefits from the contracts are within Sashas control future economic benefit in the form of regular earnings is assured and the cost may be reliably established as the amount that Sasha would have been willing to pay for them as a separate acquisition Therefore the contracts though recorded at a nominal value as an asset in the books of SS can be capitalised in the books of Sasha at the amount she would be willing to pay to acquire them separately However in the absence of an assurance that the contract will be renewed any value placed on the asset should be amortised over the four years remaining on the current contract c The logo and the associated brand is an identifiable asset because it is separable it is possible to sell assign or transfer it without disposing of the whole business as a going concern although to be economically effective it would normally be acquired as part of a whole business For example the acquisition of the brand name St Michael may not be effective unless acquired with the whole business of Marks and Spencer Besides it satisfies the capitalisation criteria because the brand would be within Sashas control may have been registered and it has a proven track record of generating income IAS 38 states that if an intangible asset acquired as part of a business combination has a finite life Sasha estimates the life of the brand as 20 years there is a rebuttable presumption that the fair value of that asset can be reliably estimated There is then a case for reporting the brand name at 400000 the amount Sasha would have been willing to pay to acquire it separately d The amount paid for cultivating customer loyalty cannot be capitalised because it would not establish control over the custom there would be no assurance that it would generate sales and more importantly it would be impossible to identify whether the ...View the full answer
Financial Accounting An Introduction
ISBN: 9780273737650
2nd Edition
Authors: Mr Barry Elliott, Mr Augustine Benedict
