Question Tag: Development Costs

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FR – Nov 2021 – L2 – Q6b – Property, Plant, and Equipment (IAS 16)

Analyze the non-current assets register for Olugbenga Nigeria Limited and compute the total carrying amount.

Question

The following information was extracted from the non-current assets register of Olugbenga Nigeria Limited for the year ended March 31, 2021.

Also, during the year, goodwill acquired from business combination amounted to N102 million. The year-end impairment test on the goodwill revealed a loss of N82 million.
Annual amortisation charge on the internally generated development costs and software
licences are based on their estimated useful life of 10 years and 15 years respectively.
The accumulated amortisations on the disposal were N110million and N40million for
development cost and software licences respectively.

Required:
Prepare a summary of the non-current assets register for Olugbenga Nigeria Limited as at March 31, 2021, showing the carrying amount of each class of asset.

Answer

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Tags: Development Costs, Goodwill, Non-current Assets, Software Licences
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2021

CR – Nov 2020 – L3 – Q2a – Intangible Assets

Prepare a note reconciling the carrying amount of Katamanso’s intangible assets, including website development costs and copyright extension fees.

Question

Katamanso Ltd (Katamanso) is a company which is a subsidiary of a media company. Katamanso’s principal asset is the rights it owns to a classic film. Katamanso had the following intangible assets as at the year end 31 December 2017:

Intangible Asset	Cost (GH¢’000)	Accumulated Amortisation (GH¢’000)	Carrying Amount (GH¢’000)
Classic Film	10,000	(6,000)	4,000
Website	150	(90)	60
Total	10,150	(6,090)	4,060

The following information includes all relevant events that occurred during the year ended 31 December 2018:

i) The film was originally published on 1 January 1970 and the rights were acquired by Katamanso on 1 January 2015 for GH¢10 million. Copyright was set at 50 years from the date the film was originally published. The film was amortized by Katamanso using the straight-line method over the remaining copyright period. However, recent legislative changes passed on 1 January 2018 have extended the copyright period from 50 years to 70 years, subject to payment of a registration fee prior to the original expiry date. This, together with associated legal costs, amounted to GH¢70,000 and was paid on 1 January 2018. As a result, the market value of the rights to the film was GH¢12.1 million at 31 December 2018, according to Katamanso’s professional valuers, who determined the valuation on 1 January 2018.

ii) During the year Katamanso developed a new interactive website to market the film and associated merchandise given its extended copyright period. The website includes its own e-commerce system for online DVD sales, direct streaming of the film, associated material, and merchandise sales. The costs incurred are as follows:

Website Development Costs	Amount (GH¢’000)
Planning the new website	8
Registration of domain names	18
Internal design costs	85
External contractor design costs	112
New content development	38
Advertising of the new website	22

The new website went live on 1 July 2018 and the old website, which was being amortised using the straight-line method over five years, was taken offline on that date and will not be used for any other purpose.

Required:
Prepare a note reconciling the carrying amount of Katamanso’s intangible assets from the beginning to the year ended 31 December 2018 as required by IAS 38: Intangible Assets.
(Note: Comparative information is not required. All amounts are material.)

Answer

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Tags: Amortization, Development Costs, IAS 38, Intangible Assets
Level: Level 3

Topic: IAS 38: Intangible assets
Series: NOV 2020

FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

Question

Soft Solutions Limited is a Nigerian company that specializes in the development of software applications. The company has been in operation for over 16 years and has invested considerable amounts of money internally in developing accounting and banking software. The treatment of these assets is prescribed by IAS 38 – Intangible Assets.

Required:
a. As a partly qualified accountant working in the accounts department of Soft Solutions Limited, the financial controller of the company asked you for a memo which addresses the following:
i. Whether internally developed intangible assets should be recognized and, if so, how should they be recorded initially and subsequently accounted for. (5 Marks)
ii. The criteria for revaluation of intangible assets? (3 Marks)

Answer

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Tags: Capitalization, Development Costs, IAS 38, Intangible Assets, Recognition Criteria
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: MAY 2019

AA – Nov 2018 – L2 – Q5 – Audit Evidence

Outline the audit tests for purchased goodwill and development projects, and the conditions for recognizing development projects in financial statements.

Question

The intangible assets that can be recognized in the statement of financial position are purchased goodwill, intangibles having a readily ascertainable market value, and development costs.

Required:
a. State five audit tests required to obtain audit evidence on purchased goodwill.
(5 Marks)

b. Identify five audit tests relevant to obtaining evidence on development projects.
(5 Marks)

c. Itemize five conditions that must be fulfilled before development projects can be recognized in the financial statements.
(5 Marks)

Answer

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Tags: Audit evidence, Development Costs, IAS 38, Intangible Assets, Purchased Goodwill
Level: Level 2

Topic: Audit evidence
Series: NOV 2018

CR – May 2019 – L3 – Q2b – IAS 38: Intangible assets

The question requires the accounting treatment for the impairment of development costs in line with IAS 36 for Alabar Ltd, with cash flow projections and a discount rate.

Question

The trial balance of Alabar Ltd extracted from the company’s general ledger as at 31 December 2017 showed a development costs balance of GH¢12.8 million. The development costs consist of amounts capitalized in 2015 and 2016 relating to a new product development. No additional development expenditure was incurred in the year ended 31 December 2017. The product began commercial production on 1 July 2017, and the company estimated at that date that, the product’s useful life was four years due to its technological nature.

Sales of the product did not achieve the amount expected during the second half of 2017, and so, at 31 December 2017, management performed an impairment test on the development expenditure. The estimated net cash flows are (at 31 December 2017 prices):

Year to 31 December 2018: GH¢3.2 million
Year to 31 December 2019: GH¢3.4 million
Year to 31 December 2020: GH¢1.6 million
6 months to 30 June 2021: GH¢0.8 million

All cash flows occur on the final day of each period mentioned. An appropriate annual discount rate (adjusted to exclude the effects of inflation) is 5%. The fair value of the development expenditure asset was expected to be less than the sum of the discounted cash flows.

The company recognizes amortization and impairment losses on development expenditure in cost of sales.

Required:
Set out the accounting treatment as the above information permits in the financial statements of Alabar Ltd for the year 31 December 2017. (6 marks)

Answer

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Tags: Cash Flow, Development Costs, Discount rate, Impairment, Intangible Assets
Level: Level 3

Topic: IAS 38: Intangible assets
Series: MAY 2019

AAA – Aug 2022 – L3 – Q3 – Audit evidence

Discuss the implications of fraud on audit completion and the sufficiency of audit evidence for development costs.

Question

You are the Senior Manager of Posterity Chartered Accountants. Security-Watch Ltd is an audit client of your firm, and the audit for the financial year ended 31 December 2021 is at the completion stage. The company installs and maintains security systems for businesses and residential customers.

Materiality for the audit of the company’s financial statements has been determined to be GH¢600,000. You are reviewing the audit working papers, and have gathered the following information:

Fraud
The Company’s Finance Director has informed the audit team that during the year, a fraud was suspected to have been committed by a Finance Officer, Ama Fofie, in the procurement department of the company. The Finance Officer is alleged to have raised fictitious supplier invoices and paid the invoiced amounts into her personal bank account. When questioned by the company’s Finance Director, Ama Fofie is alleged to have confessed that she had stolen GH¢50,000 from the company. The Finance Director asked the audit team not to perform any procedures in relation to the alleged fraudulent act, as the amount is immaterial. The Finance Director also stated that the financial statements would not be adjusted in relation to the fraud.
The only audit evidence on file is a written representation from management acknowledging the existence of the fraud, and a list of the fictitious invoices which is alleged to have been raised by Ama Fofie, provided by the Finance Director. The audit working papers conclude that the fraud is immaterial and that no further work is needed.
(6 marks)

Development Costs
In July 2021, the company commenced the development of a new security system, and incurred expenditure of GH¢1,000,000 up to the financial year end, which has been capitalised as an intangible non‑current asset. The only audit evidence obtained in relation to this balance is as follows:

Attachment of a sample of the costs included in the GH¢1,000,000 capitalised to supporting documentation such as supplier invoices.
Cash flow projection for the project, which indicates that a positive cash flow will be generated by 2022. The projection has been arithmetically checked.
A written representation from management stating that ‘management considers that the development of this new product will be successful’.

You are aware that when the Finance Director was asked about the cash flow projection which he had prepared, he was reluctant to answer questions, simply saying that ‘the assumptions underlying the projection have been agreed to be assumptions contained in the company’s business plan’. He provided a spreadsheet showing the projection, but the underlying information could not be accessed as the file was password protected and the Finance Director would not provide the password to the audit team.

Required:
a) Discuss the implications of the fraud for the completion of the audit, and the actions to be taken by Posterity Chartered Accountants.
(6 marks)

b) In respect of the development costs:
i) Comment on the sufficiency and appropriateness of the audit evidence obtained.
(10 marks)
ii) Recommend TWO (2) ways Posterity Chartered Accountants could obtain further evidence about the new security system.
(4 marks)

Answer

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Tags: Audit evidence, Development Costs, Fraud, Materiality, Professional Skepticism
Level: Level 3

Topic: Audit evidence
Series: AUG 2022

FR – Nov 2021 – L2 – Q6b – Property, Plant, and Equipment (IAS 16)

Analyze the non-current assets register for Olugbenga Nigeria Limited and compute the total carrying amount.

Question

The following information was extracted from the non-current assets register of Olugbenga Nigeria Limited for the year ended March 31, 2021.

Required:
Prepare a summary of the non-current assets register for Olugbenga Nigeria Limited as at March 31, 2021, showing the carrying amount of each class of asset.

Answer

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Tags: Development Costs, Goodwill, Non-current Assets, Software Licences
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2021

CR – Nov 2020 – L3 – Q2a – Intangible Assets

Prepare a note reconciling the carrying amount of Katamanso’s intangible assets, including website development costs and copyright extension fees.

Question

Intangible Asset	Cost (GH¢’000)	Accumulated Amortisation (GH¢’000)	Carrying Amount (GH¢’000)
Classic Film	10,000	(6,000)	4,000
Website	150	(90)	60
Total	10,150	(6,090)	4,060

The following information includes all relevant events that occurred during the year ended 31 December 2018:

Website Development Costs	Amount (GH¢’000)
Planning the new website	8
Registration of domain names	18
Internal design costs	85
External contractor design costs	112
New content development	38
Advertising of the new website	22

Answer

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Tags: Amortization, Development Costs, IAS 38, Intangible Assets
Level: Level 3

Topic: IAS 38: Intangible assets
Series: NOV 2020

FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

Question

Answer

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Tags: Capitalization, Development Costs, IAS 38, Intangible Assets, Recognition Criteria
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: MAY 2019

AA – Nov 2018 – L2 – Q5 – Audit Evidence

Outline the audit tests for purchased goodwill and development projects, and the conditions for recognizing development projects in financial statements.

Question

The intangible assets that can be recognized in the statement of financial position are purchased goodwill, intangibles having a readily ascertainable market value, and development costs.

Required:
a. State five audit tests required to obtain audit evidence on purchased goodwill.
(5 Marks)

b. Identify five audit tests relevant to obtaining evidence on development projects.
(5 Marks)

c. Itemize five conditions that must be fulfilled before development projects can be recognized in the financial statements.
(5 Marks)

Answer

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Tags: Audit evidence, Development Costs, IAS 38, Intangible Assets, Purchased Goodwill
Level: Level 2

Topic: Audit evidence
Series: NOV 2018

CR – May 2019 – L3 – Q2b – IAS 38: Intangible assets

The question requires the accounting treatment for the impairment of development costs in line with IAS 36 for Alabar Ltd, with cash flow projections and a discount rate.

Question

Year to 31 December 2018: GH¢3.2 million
Year to 31 December 2019: GH¢3.4 million
Year to 31 December 2020: GH¢1.6 million
6 months to 30 June 2021: GH¢0.8 million

The company recognizes amortization and impairment losses on development expenditure in cost of sales.

Required:
Set out the accounting treatment as the above information permits in the financial statements of Alabar Ltd for the year 31 December 2017. (6 marks)

Answer

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Tags: Cash Flow, Development Costs, Discount rate, Impairment, Intangible Assets
Level: Level 3

Topic: IAS 38: Intangible assets
Series: MAY 2019

AAA – Aug 2022 – L3 – Q3 – Audit evidence

Discuss the implications of fraud on audit completion and the sufficiency of audit evidence for development costs.

Question

Materiality for the audit of the company’s financial statements has been determined to be GH¢600,000. You are reviewing the audit working papers, and have gathered the following information:

Attachment of a sample of the costs included in the GH¢1,000,000 capitalised to supporting documentation such as supplier invoices.
Cash flow projection for the project, which indicates that a positive cash flow will be generated by 2022. The projection has been arithmetically checked.
A written representation from management stating that ‘management considers that the development of this new product will be successful’.

Required:
a) Discuss the implications of the fraud for the completion of the audit, and the actions to be taken by Posterity Chartered Accountants.
(6 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit evidence, Development Costs, Fraud, Materiality, Professional Skepticism
Level: Level 3

Topic: Audit evidence
Series: AUG 2022

Question Tag: Development Costs

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FR – Nov 2021 – L2 – Q6b – Property, Plant, and Equipment (IAS 16)

Analyze the non-current assets register for Olugbenga Nigeria Limited and compute the total carrying amount.

CR – Nov 2020 – L3 – Q2a – Intangible Assets

Prepare a note reconciling the carrying amount of Katamanso’s intangible assets, including website development costs and copyright extension fees.

FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

AA – Nov 2018 – L2 – Q5 – Audit Evidence

Outline the audit tests for purchased goodwill and development projects, and the conditions for recognizing development projects in financial statements.

CR – May 2019 – L3 – Q2b – IAS 38: Intangible assets

The question requires the accounting treatment for the impairment of development costs in line with IAS 36 for Alabar Ltd, with cash flow projections and a discount rate.

AAA – Aug 2022 – L3 – Q3 – Audit evidence

Discuss the implications of fraud on audit completion and the sufficiency of audit evidence for development costs.

FR – Nov 2021 – L2 – Q6b – Property, Plant, and Equipment (IAS 16)

Analyze the non-current assets register for Olugbenga Nigeria Limited and compute the total carrying amount.

CR – Nov 2020 – L3 – Q2a – Intangible Assets

Prepare a note reconciling the carrying amount of Katamanso’s intangible assets, including website development costs and copyright extension fees.

FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

AA – Nov 2018 – L2 – Q5 – Audit Evidence

Outline the audit tests for purchased goodwill and development projects, and the conditions for recognizing development projects in financial statements.

CR – May 2019 – L3 – Q2b – IAS 38: Intangible assets

The question requires the accounting treatment for the impairment of development costs in line with IAS 36 for Alabar Ltd, with cash flow projections and a discount rate.

AAA – Aug 2022 – L3 – Q3 – Audit evidence

Discuss the implications of fraud on audit completion and the sufficiency of audit evidence for development costs.

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Question Tag: Development Costs

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FR – Nov 2021 – L2 – Q6b – Property, Plant, and Equipment (IAS 16)

Analyze the non-current assets register for Olugbenga Nigeria Limited and compute the total carrying amount.

You're reporting an error for "FR – Nov 2021 – L2 – Q6b – Property, Plant, and Equipment (IAS 16)"

CR – Nov 2020 – L3 – Q2a – Intangible Assets

Prepare a note reconciling the carrying amount of Katamanso’s intangible assets, including website development costs and copyright extension fees.

You're reporting an error for "CR – Nov 2020 – L3 – Q2a – Intangible Assets"

FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

You're reporting an error for "FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)"

AA – Nov 2018 – L2 – Q5 – Audit Evidence

Outline the audit tests for purchased goodwill and development projects, and the conditions for recognizing development projects in financial statements.

You're reporting an error for "AA – Nov 2018 – L2 – Q5 – Audit Evidence"

CR – May 2019 – L3 – Q2b – IAS 38: Intangible assets

The question requires the accounting treatment for the impairment of development costs in line with IAS 36 for Alabar Ltd, with cash flow projections and a discount rate.

You're reporting an error for "CR – May 2019 – L3 – Q2b – IAS 38: Intangible assets"

AAA – Aug 2022 – L3 – Q3 – Audit evidence

Discuss the implications of fraud on audit completion and the sufficiency of audit evidence for development costs.

You're reporting an error for "AAA – Aug 2022 – L3 – Q3 – Audit evidence"

FR – Nov 2021 – L2 – Q6b – Property, Plant, and Equipment (IAS 16)

Analyze the non-current assets register for Olugbenga Nigeria Limited and compute the total carrying amount.

You're reporting an error for "FR – Nov 2021 – L2 – Q6b – Property, Plant, and Equipment (IAS 16)"

CR – Nov 2020 – L3 – Q2a – Intangible Assets

Prepare a note reconciling the carrying amount of Katamanso’s intangible assets, including website development costs and copyright extension fees.

You're reporting an error for "CR – Nov 2020 – L3 – Q2a – Intangible Assets"

FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

You're reporting an error for "FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)"

AA – Nov 2018 – L2 – Q5 – Audit Evidence

Outline the audit tests for purchased goodwill and development projects, and the conditions for recognizing development projects in financial statements.

You're reporting an error for "AA – Nov 2018 – L2 – Q5 – Audit Evidence"

CR – May 2019 – L3 – Q2b – IAS 38: Intangible assets

The question requires the accounting treatment for the impairment of development costs in line with IAS 36 for Alabar Ltd, with cash flow projections and a discount rate.

You're reporting an error for "CR – May 2019 – L3 – Q2b – IAS 38: Intangible assets"

AAA – Aug 2022 – L3 – Q3 – Audit evidence

Discuss the implications of fraud on audit completion and the sufficiency of audit evidence for development costs.

You're reporting an error for "AAA – Aug 2022 – L3 – Q3 – Audit evidence"

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