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Dear Ken,
I am reading the answer for the audit procedures and confused.
1. JLC brand is recognized at cost without amortisation, indicating that the brand is treated as intangible asset with indefinite useful life.
IAS 38 requires that the indefinite useful life assumption to be reviewed annually to confirm whether the circumstances still support the assumption.
As such, audit procedure “Review the level of planned expenditure on marketing and advertising to support the brand name, and consider its adequacy to maintain the image of the brand.” is used to address the issue. Is it correct?
As we can see that the revenue has fallen in the year, but significant marketing cost has been/will be spent to promote the brand. Does it mean that the indefinite useful life assumption is still valid?
2. Since the brand is intangible asset with indefinite useful life, it is subject to impairment review annually regardless of whether there is any indication of impaiment.
If this is the case, why the answer includes procedure “Review the monthly income streams generated by the JLC brand, for indication of any decline in sales.”? Is this a procedure for auditor to look for indication of impairment?
Thank you.
Regards,
Marthew1. An indefinite useful life for a brand can only be claimed where there is action taken to support it (otherwise, for example, if it’s been a successful brand – there will be a competitor out there with a similar product; consider for example, coca-cola v pepsi). So the proposed audit procedure you query is valid.
Spending money in advertising campaigns supports management’s assumption that the brand has an indefinite useful life, but cannot guarantee it – nothing can – since reputational damage could destroy a brand overnight.
2. In part (b), the point “The falling revenue figures could indicate that the asset is overvalued.”, could have used the word impairment i.e. we already have an indicator of impairment. Even if we didn’t have any indication, as you say, an impairment review should be carried out every year. Using the principle that the carrying amount of an asset should not exceed it’s recoverable amount, one of the factors to consider is whether there is any deterioration in the future revenue stream. If there is, this would be measurable – so the procedure isn’t just looking for indication (because we already know revenue is falling).
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