Bakau Hijau Sdn Bhd is a Malaysian oyster breeding company. Oyster is getting its popularity but it is growing slowly. Bakau Hijau has reported significant increases in sales and net income in recent years. While sales increased from RM50 million in 2010 to RM120 million in 2019, profit increased from RM3 million to RM12 million over the same period. The stock market and analysts believe that the companys future is very promising. In early 2020, the company was valued at RM350 million, which was three times 2019 sales and 26 times estimated 2020 profit.

What is the secret of Bakau Hijau success? Company management and many investors attribute the companys success to its marketing flair and expertise. Instead of competing on price, Bakau Hijau prefers to focus on service and innovation, including:

Individual customers are given a set of pearl as a gift if they buy RM10,000 oyster and above.

Customers from hotels or restaurants within Kedah are given free transportation if they buy oyster for more than RM30,000 per day.

As a result of such innovations, customers accept prices that are 60% above those of competitor. In addition it was not easy to find oyster companies in Kedah. Bakau Hijau maintains a gross profit margin of around 40%.

Nevertheless, some investors have doubts about the company as they are uneasy about certain accounting policies the company has adopted. For example, Bakau Hijau capitalises the costs of breeding oyster spawn (RM4.2 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 all spawn will be an oyster after 3 years.

In addition to the spawn, Bakau Hijau constructed a building and lab costing RM800 000 on 4 July 2020. This building and lab is also recognised as a non-current asset.

Bakau Hijau business is growing and they are now using Macau technology to breed the oyster spawn. Bakau Hijau acquired all the assets and liabilities of an oyster business in Macau, Macincau Holdings and took over that companys operation. Macincau Holdings has developed their own brand name, Cau Oyster was sold at RM1 mil to Bakau Hijau. Bakau Hijau then capitalised the amount under Non Current Assets.

Bakau Hijaus 2019 statement of financial position also reported RM7.5 million of marketing costs as non-current assets. If the company had expensed marketing costs as incurred, 2019 net income would have been RM10 million instead of the reported RM12 million. The concerned investors are uneasy about this capitalisation of marketing costs, as they believe that Bakau Hijaus marketing practices are relatively easy to replicate. However, Bakau Hijau argues that its accounting is appropriate. Bakau Hijau just produced their own oyster sauce and 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.

Required

Examine Bakau Hijaus costs that should be accounted for under IFRS/MFRS 138 Intangible Assets.

Note: Examine each of the cost and suggest a suitable accounting treatment to record the costs.