Question

Investor is a listed company with a number of subsidiaries located throughout the United Kingdom. Investor currently appraises investment opportunities using a cost of capital of 10 per cent. On 1 April 20X9 Investor purchased 80 per cent of the equity share capital of Cornwall for a total cash price of Shs.60m. Half the price was payable on 1 April 20X9; the balance was payable on 1 April 20Y1. The net identifiable assets that were actually included in the statement of financial position of Cornwall had a carrying value totaling Shs.55m at 1 April 20X9. With the exception of the pension provision (see below), you discover that the fair values of the net identifiable assets of Cornwall at 1 April 20X9 are the same as their carrying values. When performing the fair-value exercise at 1 April 20X9, you discover that Cornwall has a defined-benefit pension scheme that was actuarially valued three years ago and found to be in deficit. As a result of that valuation, a provision of Shs.6m has been built up in the statement of financial position. The fair-value exercise indicates that on 1 April 20X9, the pension scheme was in deficit by Shs.11m. This information became available on 31 July 20X9. Assume that today's date is 31 October 20X9. You are in the process of preparing the consolidated financial statements of the group for the year ended 30 September 20X9. Intangible assets are normally written off on a pro-rata basis over twenty years. Your financial director is concerned that profits for the year will be lower than originally anticipated. She is therefore wondering about changing the accounting policy used by the group, so that all intangible assets are treated as having an indefinite useful life. Required (b) Write a memorandum to your financial director. (i) Evaluate the policy of writing off all intangible assets over twenty years (7MARKS) (ii) Explain whether it is ever permissible to select a longer write-off period for intangible assets, and describe the future implications of selecting such a period (8 marks)

a) The policy is appropriate and aligns with standard practices.
b) The policy may need reevaluation based on current market conditions.
c) Extending the write-off period may improve short-term profits.
d) The policy should be changed to treat all intangible assets as having an indefinite useful life.

Answer 1

The policy of writing off intangible assets over twenty years should be evaluated based on the specific circumstances. It may be permissible to select a longer write-off period for intangible assets, but this decision should be carefully assessed. The financial director should consider consulting with accounting experts before changing the policy.

Step-by-step explanation:

The policy of writing off all intangible assets over twenty years should be evaluated based on the specific circumstances of the company and the nature of the intangible assets. While it is a common practice to assign a fixed useful life to intangible assets and write them off over a specific period, this approach may not always reflect the economic reality of the assets. If the intangible assets have an indefinite useful life, it may be more appropriate to treat them as such and not write them off over a fixed period.

It is sometimes permissible to select a longer write-off period for intangible assets if there is evidence to support the longer useful life. However, this decision should be based on a careful assessment of the specific circumstances and the future prospects of the assets. Choosing a longer write-off period may result in higher profits in the short term, as the expenses associated with the assets are spread over a longer period. However, it may also lead to an overstatement of profits in the early years and a potential understatement of profits in the later years.

Ultimately, the decision to change the accounting policy for intangible assets should be based on a thorough analysis of the company's specific circumstances and the economic reality of the assets. The financial director should consider consulting with accounting experts and assessing the potential impact on the company's financial statements before making any changes.