Question 2: Baine Ltd is an Australian mail-order company. Although the sector in Australia is growing slowly, Baine Ltd has reported significant increases in sales and net income in recent years. While sales increased from $100 million in 2010 to $240 million in 2019, profit increased from $6 million to $24 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 $700 million, which was three times 2019 sales and 26 times estimated 2020 profit. Company management and many investors attribute the companys success to its marketing flair and expertise. Instead of competing on price, Baine Ltd prefers to focus on service and innovation, including: free delivery free gift with orders over $200 As a result of such innovations, customers accept prices that are 60% above those of competitors, and Baine 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, Baine Ltd capitalises the costs of its direct mailings to prospective customers ($8.4 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 customers will be obtained and retained from direct mailings. In addition to the mailing lists developed by in-house marketing staff, Baine Ltd purchased a customer list from a competitor for $900 000 on 4 July 2020. This list is also recognised as a non-current asset. Baine Ltd estimates that this list will generate sales for at least another 2 years, more likely another 3 years. The company also plans to add names, obtained from a phone survey conducted in August 2020, to the list. These extra names are expected to extend the lists useful life by another year. Baine Ltds 2019 statement of financial position also reported $7.5 million of marketing costs as non- current assets. If the company had expensed marketing costs as incurred, 2018 net income would have been $10 million instead of the reported $12 million. The concerned investors are uneasy about this capitalisation of marketing costs, as they believe that Baine Ltds marketing practices are relatively easy to replicate. However, Baine Ltd argues that its accounting is appropriate. 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: Explain how Baine Ltds treatment of costs should be accounted for under AASB 138/IAS 38 Intangible Assets. Structure your answer by emphasizing on the following costs. Customer list acquired Internally generated customer mailing list Marketing costs (Refer to the definition of assets and liabilities in the Conceptual Framework).