Question
During the year ended 30 June 2020Pharma Ltd has been developing the design for a recyclable protective mask that can be worn for longer hours
During the year ended 30 June 2020Pharma Ltd has been developing the design for a recyclable protective mask that can be worn for longer hours and offers a higher level of protection. A patent for the design was registered on 30 June 2020.
Although the patent has a legal life or 20 years, there is the possibility that potential developments in competing technologies could result in the patent becoming redundant after five years.
Pharma Ltd plans to commence production of the masks in July 2020.
Pharma had incurred the following expenditure on the research and design of the masks during the year ended 30 June 2020:
Research on alternative materials$25 000
Material and laobur costs incurred in design the mask$70 000
Testing the mask in Pharma's laboratories$10 000
Registration fees for the patent$20 000
The fair value of the patent at 30 June 2020 is estimated at $250 000 as a result of a recent surge in demand for protective face masks. The present value of the estimated future cash flows of using the patent is $275 000.
Required
Please label your responses.
a) What is the main accounting policy issue (or issues)in relation to the patent?
b) Describe two principles or rules that are relevant to the accounting policy issue. At least one principle or rule should come from AASB 138 Intangible Assets (references not required). (4 marks)
c) The manager suggests recognising the patent at fair value and amortising it over 20 years.Describe another policy to account for the patent. You may ignore disclosure.Please do NOT justify your policy in answering part c).
d) Evaluate the policy proposed by the manager and the policy that you proposed in part c), in terms of how well each policy satisfies the principles or rules that you identified in part b) and any other relevant principles or rules. Please label each evaluation separately.
e) Assuming your policy is adopted, state the carrying amount of the patent at 30 June 2020 and 30 June 2021. If applicable, assume no change in fair value occurs during the year ended 30 June 2021
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