Q2

(a) A listed publishing company, Ffuts Ltd (FL) established Recreational Accounting a financial accounting e-magazine in April 2015. Subscribers pay a monthly subscription to access the magazine, and also a variable fee depending on how many articles they download. The site has proven to be highly successful; especially after a serious case of financial accounting fraud was reported in the e-magazine. An independent brand valuer recently valued the brand at NZ$25 million. Subsequently, FL was approached by an international publisher who has offered to buy the e-magazine for US$20 million. However, FL has no intention of selling the title as it expects continued growth.

REQUIRED: FLs accountant asks you to advise on how FL should value Recreational Accounting in its next set of financial statements.

(b) Ebikequitous Limited (EL) is a New Zealand-based designer, manufacturer and wholesaler of e-bikes. EL has been developing a lightweight, folding e-bike, which it has trademarked as the Eunicycle. The Eunicycle is designed to meet growing demand for a compact personal transport device which can be carried onto public transport, and that will even fit into airline carry-on luggage.

Research into this new product commenced on 1 August 2016. On 1 February 2017, ELs management determined that the recognition criteria as an Intangible Asset had been met.

Costs incurred related to the R&D of the Eunicycle are as follows: Costs to 1 February 2017: $1,050,000 Costs from 1 February 2017 to 31 March 2017: $750,000

At 31 March 2017, management estimates the recoverable amount of the R&D to be: $2,300,000

During the year ended 31 March 2018, EL incurs a further $1,200,000 of costs in developing the Eunicycle. However, on 30 March 2018, the NZ government issues new regulations which prohibit the use of one-wheeled vehicles on public roads, footpaths or cycle paths. Since EL had expected New Zealand to be its main market, EL reassesses the recoverable amount of the Eunicycle to be $1,100,000, being the estimated present value of the product, based on budgeted future export sales. EL has a 31 March balance date.

REQUIRED:

(i) Briefly describe what is meant by recognition criteria for an intangible asset, and discuss how ELs management determined that the recognition criteria for the Eunicycle have been met on 31 March 2017.

(ii) How much of the research and development costs should be recognised as an expense and how much should be capitalised in the 31 March 2017 financial statements? Show your calculations and explain your reasoning.

(iii) How much of the research and development expenditures should be recognised as an expense and how much should be capitalised as development expenditure in the 31 March 2018 financial statements? Show your calculations and explain your reasoning.