Treatment of Intangible Assets in Financial Statements - ChiHerbal Ltd

This article discusses the treatment of intangible assets in the financial statements of ChiHerbal Ltd. It covers the provisions of AASB 138 and the selective capitalization method. The article also provides a detailed analysis of the expenses related to the development of a technology by the company.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Answer to Scenario 1.................................................................................................................2
A)............................................................................................................................................2
B)............................................................................................................................................3
Answer to Scenario 2.................................................................................................................3
Answer to Scenario 3.................................................................................................................5
A)............................................................................................................................................5
B)............................................................................................................................................6
C)............................................................................................................................................6
Answer to Scenario 4.................................................................................................................7
Introduction............................................................................................................................7
Analysis..................................................................................................................................8
Conclusion..............................................................................................................................9
Reference..................................................................................................................................10

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Answer to Scenario 1
A)
In the books of Chiherbal. Ltd
Journal entries
Date Particulars Debit Credit
1.11.17 Bank
$56,667,000.0
0
share Application
$56,667,000.0
0
(Being the application money of 800000
shares ware received and 100000 share's
holders had paid the due amount in full and
300000 share's holders holds paid @ $9 per
share.)
7.11.12 Share Application A/c.
$56,667,000.0
0
Share Capital A/c. $3,360,000.00
shareholders fund $2,307,000.00
Bank $84,000.00
(Being the allotment of the share are
provided on pro-rata are transfer to share
capital. Basis for 500000 share at $3 per
share)
15.8.17 Share Allotment A/c. $1,250,000.00
Share Capital A/c. $1,250,000.00
(Being the allotment money receivable for
500000 shares @ 2.5 per share.)
7.11.17 share issue Expense $12,000.00
Bank a/c $12,000.00
(Being the legal fees and the duties are paid)
7.11.17 share application A/c $84,000.00
Bank $84,000.00
1.11.17 Share Allotment A/c $3,920,000.00
Share Capital $3,920,000.00
being the allotment money remain due
1.12.17 Bank A/c $1,960,000.00
share application fund $1,960,000.00
Share allotment $3,920,000.00

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(Being the allotment money received.)
1.2.18 share 1st call A/c $1,328,000.00
Share Capital A/c. $1,328,000.00
(Being the first call money is due)
1.3.18 Bank A/c. $1,162,000.00
Share Application Fund $166,000.00
To, share 1st call A/c $1,328,000.00
Being the second call money received and
the balance transfers from the shareholders
fund.
1.6.18 share final call $1,688,000.00
Share Capital $1,688,000.00
(Being the 15000 share application money is
forfeited according to board resolution no:)
18.6.18 Bank A/c. $1,477,000.00
Share application $211,000.00
Share final call $1,688,000.00
(Being the forfeited share are re issued at $6
per share.)
B)
Statement of Financial Position
Particulars Amount Amount
Current Assets xxxx
Non-Current Assets xxxx
Total Assets xxxx
Current Liability xxxx
Non-Current Liability xxxx
Total Liability xxxx
Equity
Authorized (100000) 128700000
Equity Shares Issued (800000 @12.87) 10296000
Answer to Scenario 2
In the books of Chiherbal. Ltd
Journal entries

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Date Particulars Debit Credit
31.12.16 Depreciation $15,000.00
Machine A $15,000.00
31.12.16 Depreciation $10,000.00
Machine B $10,000.00
31.12.16 Accumulated Depreciation $25,000.00
Depreciation $25,000.00
31.12.16 Loss on Revaluation $5,000.00
Accumulated Depreciation $5,000.00
30.6.17 Depreciation $15,000.00
Machine A $15,000.00
30.6.17 Depreciation $15,500.00
Machine B $15,500.00
30.6.17 Accumulated Depreciation $30,500.00
Depreciation $30,500.00
30.6.17 loss on Revaluation $5,000.00
Accumulated Depreciation $5,000.00
Calculation of Depreciation for Machine A
Particulars Amount
Acquisition Cost $300,000.00
Carrying Cost $180,000.00
Accumulated Depreciation $120,000.00
Estimated useful life (years) 10
Depreciation till 31.12.2016 $15,000.00
Fair Value on 31.12.2016 $180,000.00
Revised useful life (years) 6
Depreciation on 30.06.2017 $15,000.00
Fair value on 30.06.2017 $163,000.00
Carrying Value on 30.06.2017 $165,000.00

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Loss on Revaluation $2,000.00
Calculation of Depreciation for Machine B
Particulars Amount
Acquisition Cost $200,000.00
Carrying Cost $170,000.00
Accumulated Depreciation $30,000.00
Estimated useful life (years) 10
Depreciation till 31.12.2016 $10,000.00
Fair Value on 31.12.2016 $155,000.00
Carrying value on 31.12.2016 $160,000.00
Loss On Revaluation $5,000.00
Revised useful life (years) 5
Depreciation on 30.06.2017 $15,500.00
Fair value on 30.06.2017 $136,500.00
Carrying Value on 30.06.2017 $139,500.00
Loss on Revaluation $3,000.00
Answer to Scenario 3
A)
In accordance with the IFRS and the AASB 16, the lease will be regarded as the
operating lease if the asset is transferred to the lesser by the leases on specific terms for a
particular period. In the operating lease, the losses and gains from the assets will be borne by
the lesser. In this lease after the expiry of the term, the lease will be transfers to the lease
(Minsky, 2016).
The accounting of the operating lease are treat as the right to use of the asset but the
ownership is not transfer. Further, the asset are not qualified to show in the balance sheet. In
addition to that, the liabilities of rent or other in associate with the lease cannot be treated as
the liability. In the current case, it is an operating lease.

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B)
Statement showing calculation of present value
Particulars Amount
Period of lease 5
guaranteed residual value $3,115.00
interest rate 15%
lease rental amount $30,500.00
Fair value of leased asset $129,000.00
present value of annuity 2.855
Discounting factor 0.497176735
Present value $119,126.21
Statement showing calculation of repayment Schedule
Date
Annual
Payment
Interest
Expense Liability Reduction
Liability
Balance
31.12.1
6 $119,126.21
31.12.1
6 $30,500.00 $30,500.00 $88,626.21
31.12.1
7 $30,500.00 $13,293.93 $17,206.07 $71,420.14
31.12.1
8 $30,500.00 $10,713.02 $19,786.98 $51,633.16
31.12.1
9 $30,500.00 $7,744.97 $22,755.03 $28,878.13
31.12.2
0 $33,209.85 $4,331.72 $28,878.13 $0.00
C)
Journal Entry
Date Particulars Debit Credit
31.12.16 cash $129,000.00
Lease liability $129,000.00
31.12.17 Interest $13,293.93
lease liability $13,293.93
31.12.17 lease liability $30,500.00
Cash $30,500.00
31.12.18 Interest $10,713.02

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lease liability $10,713.02
31.12.18 lease liability $30,500.00
cash $30,500.00
31.12.19 Interest $7,744.97
lease liability $7,744.97
31.12.19 lease liability $30,500.00
cash $30,500.00
31.12.20 Interest $4,331.72
lease liability $4,331.72
31.12.20 lease liability $33,209.85
cash $33,209.85
Answer to Scenario 4
Introduction
In this section, a detailed discussion is provided regarding the treatment of various
expenses related to intangible Assets. ChiHerbal Ltd is working on developing a technology
that is supposed to help to grow and improve the business of the company. This assessment is
being created to analyse the financial statement of the company and identify the intangible
assets. Presently the company is working on to develop filter regarding the heavy iron
emitting problem from the bore made by the company which are causing trouble to its
customer by leaving brown stain in the paths and garden edges. As the product is still under
development, there is some error constantly being observed by the supervisors of the project
for which it cannot be launched in the market. There is another fact that is delaying the
launch of the product that the market is not developed enough yet for this product. For further

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analysis, provision of AASB 138 must be revised to configure that if the cost included in the
development of this project can be regarded as intangible assets or not.
Analysis
Like any other product produced by ChiHerbal Ltd, this technology is also expected
to help the company to increase the generated revenue. The expenses in this project should
meet all requirements of provisions of AASB 138 to be considered as intangible assets.
According to the provisions of AASB 138, an intangible asset cannot be physical in
nature. Apart from this, according to the provisions, the asset should also prove itself
beneficial to the manufacturing or selling company economically. The production and
research cost of the asset should also be measured significantly in order to identify it as an
intangible asset. The main motive to develop the technology by ChiHerbal is to increase the
sales of the company (Damodaran, 2016). The cost regarding the development of the asset
can be capitalised or it can be identified as an intangible asset. Any research work made for
improving, researching or planning of a product, asset or item can be considered as a
development cost. The product, asset or item should also have an economical influence on the
business in order to recognise itself as the same. The cost regarding the production or
research work for the object should also be considered in accordance with the provisions of
AASB 138.
The selective capitalization method is used to recognize the development expenses.
This method is divided into two parts. In the first part, the expenses must be treated as
capitalized or as an intangible asset. As of the other one, the other costs must be counted as
the general expenses of the business. So it is necessary for ChiHerbal Ltd to distinguish
between the capitalized costs and general expenses regarding the production of the asset. It is
the responsibility of the management to identify those expenses separately to be able to

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identify an intangible asset. It is also necessary to disclose several data in the financial
statement of the company regarding the development and research of the asset. According to
the provisions of AASB 138, the total amounts spend in the research and development of the
product should be mentioned in the financial report of the company in order to recognise the
asset as an intangible asset. If any types of consultant expenses are included in developing in
the project, the expenses should also be disclosed in the financial report of the company.
In this case, as shown in the report, the cost of the research conducted to develop the
filter, design and construction of the prototype, testing of models, fees for preparing patent
application, research for modification of the design and the legal fees to protect the patent
against cheap copies is fulfilling all the requirements stated in the provisions of AASB 138.
Such as, these expenses are not materialistic, these are being capitalised and these are being
disclosed in the financial statement of the company (Härdle et al., 2017). Thus theses
expenses can be called as intangible assets in terms of the provisions AASB 138.
Conclusion
The above analysis clarifies that the expenses regarding the development of the asset
has fulfilled each of the requirements stated in the above. The capitalization amount and the
general expenses regarding the development of the project both are disclosed in the financial
statement of the company. As the asset is qualified in every criteria of provision of AASB
138, there is no doubt that it can be considered and identified as an intangible asset of the
business. As it is, the management must follow all the regulation regarding to the accounting
standards on assets described on provisions of AASB 138.

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Reference
Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and
corporate finance (Vol. 324). John Wiley & Sons.
Härdle, W. K., Hautsch, N., & Overbeck, L. (Eds.). (2017). Applied quantitative
finance (Vol. 2). Springer.
Minsky, H. (2016). Can" it" happen again?: essays on instability and finance. Routledge.