Question 1 (20 marks) On 1 July, 2019, Harvest Food Ltd (Harvest), a publicly listed company, successfully acquired the entire share capital of Maxam Ltd (Maxam), a food processing company and restaurant group. The terms of the bid by Harvest were improved several times as rival bidders also made offers for Maxam. The terms of the initial bid by Harvest were 20 million $1 ordinary shares in Harvest. Each share had a stock market price of $7 immediately prior to the bid and a cash element of $30 million. The final bid that was eventually accepted on 1 July 2019 by Maxam's shareholders improved the cash offer to $50 million and included a redeemable loan note of a further $50 million that will be redeemed on 30 June 2023. It carried no interest, but market rates for this type of loan note were 13% per annum. There was no increase in the number of shares offered but at the date of acceptance the price of Harvest's shares on the stock market had risen to $8.00 each. The present value of $1 receivable in a future period where interest rate is 13% can be taken as at end of year 3 at end of year 4 $0.70 $0.60 The fair value of Maxam's net assets other than its intangible long-term assets was assessed by Harvest to be $128 million. This value had not changed significantly throughout the bidding process. The details of Maxam's intangible assets acquired were: i The brand name of 'Grandma Hotpot, a popular hotpot chain in Hong Kong. A rival brand name thought to be of a similar reputation and value to 'Grandma Hotpot' had recently been acquired for a disclosed figure of $24 million. ii A government licence for Maxam to operate a canteen in a new government building for the next five years. The licence is difficult to value as there was no fee payable for it. However, as Maxam is the only company that can operate the canteen. The directors of Maxam have estimated the licence to be worth $10 million. The assets invested for the canteen has been included as part of Maxam's property, plant and equipment. iii A fishing quota of 10,000 tonnes per annum in territorial waters. A specialist company called Quotasales actively trades in these and other quotas. The price per tonne of these fishing quotas at the date of acquisition was $3,200. The quota is for an indefinite time period, but in order to preserve fish stocks the government has the right to vary the weight of fish that may be caught under a quota. The weights of quota are reviewed annually. iv The remainder of the long-term intangible assets is attributable to Maxam's goodwill. Required: For each of the above intangible assets, determine their values which should be reported in Harvest's Statement of Financial Position on 1 July 2019. Justify your recommended accounting treatment with reference to HKAS 38 'Intangible Assets'. (Hint: you should state clearly whether or not each of the items fulfil the definition and recognition criteria as prescribed in the Accounting Standard.) Question 1 (20 marks) On 1 July, 2019, Harvest Food Ltd (Harvest), a publicly listed company, successfully acquired the entire share capital of Maxam Ltd (Maxam), a food processing company and restaurant group. The terms of the bid by Harvest were improved several times as rival bidders also made offers for Maxam. The terms of the initial bid by Harvest were 20 million $1 ordinary shares in Harvest. Each share had a stock market price of $7 immediately prior to the bid and a cash element of $30 million. The final bid that was eventually accepted on 1 July 2019 by Maxam's shareholders improved the cash offer to $50 million and included a redeemable loan note of a further $50 million that will be redeemed on 30 June 2023. It carried no interest, but market rates for this type of loan note were 13% per annum. There was no increase in the number of shares offered but at the date of acceptance the price of Harvest's shares on the stock market had risen to $8.00 each. The present value of $1 receivable in a future period where interest rate is 13% can be taken as at end of year 3 at end of year 4 $0.70 $0.60 The fair value of Maxam's net assets other than its intangible long-term assets was assessed by Harvest to be $128 million. This value had not changed significantly throughout the bidding process. The details of Maxam's intangible assets acquired were: i The brand name of 'Grandma Hotpot, a popular hotpot chain in Hong Kong. A rival brand name thought to be of a similar reputation and value to 'Grandma Hotpot' had recently been acquired for a disclosed figure of $24 million. ii A government licence for Maxam to operate a canteen in a new government building for the next five years. The licence is difficult to value as there was no fee payable for it. However, as Maxam is the only company that can operate the canteen. The directors of Maxam have estimated the licence to be worth $10 million. The assets invested for the canteen has been included as part of Maxam's property, plant and equipment. iii A fishing quota of 10,000 tonnes per annum in territorial waters. A specialist company called Quotasales actively trades in these and other quotas. The price per tonne of these fishing quotas at the date of acquisition was $3,200. The quota is for an indefinite time period, but in order to preserve fish stocks the government has the right to vary the weight of fish that may be caught under a quota. The weights of quota are reviewed annually. iv The remainder of the long-term intangible assets is attributable to Maxam's goodwill. Required: For each of the above intangible assets, determine their values which should be reported in Harvest's Statement of Financial Position on 1 July 2019. Justify your recommended accounting treatment with reference to HKAS 38 'Intangible Assets'. (Hint: you should state clearly whether or not each of the items fulfil the definition and recognition criteria as prescribed in the Accounting Standard.)