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Dear ma’am,
ZCG question:
In this question, the company purchases a license on 1 Jan X5. However it records the purchase as an intangible asset on 31 Dec X5. The asset is ready for use in 30 June X6. The company’s year end is December of every year. The question asks to identify audit risks.The obvious risk is the amortization and when to ammortize and to ensure the amount recorded is accurate. My question is:
Isn’t there an audit risk, that the asset is actually recorded 12 months after it was purchased? Thereby undervaluing an asset? Or should intangible assets be recorded only once they are ready for use, and not when they are paid for?
Thanks
The Q states “The licence was recognised as an intangible asset at cost in the Group statement of financial position at 31 December 2015.” This does not mean that it was not recorded in the books of account until that date – it’s just the first reporting date after it was purchased and this information tells you that it is in SoFP rather than expensed entirely to SoPL.
“The licence lasts for 10 years from the date that it was purchased.” – i.e. 10% amortisation through the passage of time might be expensed in 20X5. However, amortisation (like depreciation) should be recognised as an expense when asset is in use (“matching” principle). You will see in the calculation in the answer that no depreciation is expected in 20X5 and only 6 months of 8.5 years (remaining life) in 20X6.
“Since the network became operational [i.e. 6 months after the reporting date], customer demand has been less than anticipated due to a competitor offering a special deal to its existing customers to encourage them not to change providers.” Fall in demand is an indicator of possible impairment.
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