CASE 2:The Boar Plan

In 20X1 Antiques Galore Ltd went on-line. This was a relatively small venture and involved nothing more than launching a website, which it used to provide the location and contact details of Antique Galore stores.

After a few years of declining profits, management went on a retreat in the Barossa Valley and developed a new strategic plan to become the biggest on-line antique retailer (the BOAR Plan). After considerable research in how to become an on-line retailer Antiques Galore Ltd decided to develop its website to serve the following functions for years to come:

Publish electronic catalogues of items for sale

Advertise special promotions

Enable customers to place orders

Enable customers to make credit card payments for goods ordered

Enable customers to purchase and use gift card vouchers

Enable customers to register to receive an electronic newsletter about antiques[1]

Host an intranet to enable retail staff to access information about stock levels in other Antiques Galore shops.

Exhibit A (next page) lists key events pertaining to the development of the website.

In the early stages of implementing the BOAR Plan, the chief financial officer (CFO) of Antiques Galore Ltd noticed that the company's accounting manual did not mention website costs. He decided to open a general ledger account called "website costs" to accumulate to record all costs associated with the emerging website and, thus, put off making any decision about how to account for them until now, when it is time to prepare the financial statements of Antiques Galore Ltd for the year ended 31 December 20X4.

During December 20X4 and January 20X5 Antiques Galore Ltd engaged in a University accounting internship programme. The intern (student doing work integrated learning) was given the project of reconciling the Website Costs account, which by that time had accumulated over $400,000 in costs. The summary is provided in Exhibit B, which appears on the next page.

[1] Antiques Galore Ltd does not currently produce an electronic newsletter, or any other form of newsletter but staff in the IT Department thought it would be better to design the website with that capability in case the company later decides to produce one.

Exhibit A: Key Events in the Development of the Website

Date, 20X4

Event

31 January - Senior management approve the BOAR plan

31 March- After investigating alternative arrangements, including outsourcing on-line retailing, and relying on the accounting department's capital budgeting analysis, senior management decided to invest in website development to enable on-line retailing

30 April - Specifications were sent to external suppliers to quote on developing the website

31 May - After evaluating quotes, management decided the website should be developed internally by the IT Department

Exhibit B: Reconciliation of Website Costs

Date(s) 20X4

Details

$

February - Registration and travel costs for marketing director's attendance of a conference on on-line marketing - 12,000

February - Accounting department labour costs in completing the capital budgeting analysis for the investment in the website - 6,000

April - IT department labour costs for consulting staff who will use the website so as to develop specifications of their requirements, such as customer records and security needs - 17,000

May - Accounting department labour costs for preparing analysis of IT department costs to develop the website - 5,000

June -July - IT department labour costs for developing code for on-line customer orders - 87,000

28 July - Purchase and installation of security software to facilitate customer payment by credit card for purchases - 100,000

August - IT department labour costs for developing code to integrate the website orders with the accounting information system - 23,000

20-24 September - In-house training workshops that serve the dual purpose of testing the software and staff training in its use - 40,000

22 October - Graphic artwork for new company logo that will be used in shops, on all stationery, on uniforms and on the website - 50,000

November - Advertising to promote launch of on-line antique shopping - 30,000

November - IT department labour costs for stress testing all website systems - 25,000

28 November - Party held on premises to celebrate passing the stress tests and completion of the development of the website - 4,000

16-20 Dec. - IT department labour costs - 7,000

Please assume that any amortisation for the month of December that may be applicable is considered immaterial for the year ended 31 December 20X4.

Required

a)Evaluate the alternatives by explaining:

i) why measuring the website at fair value is not consistent with Australian Accounting Standards.

ii) how the policy you proposed in part c) is consistent with the principles identified in part b). In answering this part of the question please explain why items have been included or excluded. State any assumptions that you consider necessary.