Miss Tess Chow, a director of Magic Holding Limited (MHL), noticed that a patent
ID: 2589643 • Letter: M
Question
Miss Tess Chow, a director of Magic Holding Limited (MHL), noticed that a patent acquired from an acquisition of a subsidiary has been recognised in the financial statements of MHL at its fair value on 31 December 2015. She would also like other intangible assets of MHL to be recognised in the financial statements at their fair values, and thus she has asked for your opinion on the following items: 1. MHL has a brand name, Magica, which has become well known since MHL $5 million. Tes asset and report it at $5 million in the financial statements of MHL developed it 10 years ago. Valuation experts have valued the brand name at s would like this brand name to be recognised as an intangible 2. MHL owns a 20-year patent which it acquired five years ago for $2 million and was recognised at its cost in the financial statements. Valuation experts have valued this patent at St0 millon tes would hke to report this patent at this patent at $10 million in the financial statements. Required: Discuss the appropriate accounting treatment for the brand name and the paten (HKICPA QP A December 2013, adapted)Explanation / Answer
Intangible asset is an asset which is identifiable, non monetary asset, without physical substance held for use in production of goods, rendering of services or for rental purposes.
1. Brand should not be recognised as an intangible asset as according the Recognition principle i.e. there should be future economic benefits should flow towards an entity and cost can be measured reliably, therefore brand should not be recognised as its cost cannot be measured reliably.
2. Revaluation of Patent :- (million $)
Patent a/c Dr. 8
TO profit and loss a/c 8
(Being patent revalued for market value )