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  • This topic has 2 replies, 2 voices, and was last updated 10 years ago by MikeLittle.
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  • Author
    Posts
  • May 6, 2015 at 11:08 pm #244457
    shaina
    Member
    • Topics: 14
    • Replies: 12
    • ☆

    Hi Mike,

    I have a list of requirements which i need to note the accounting treatment for.

    On 1st May 20×3 company b bids $100m for a license to use a radio spectrum for the next generation of mobile phone services. This technology will be offered to customers in 20×5.

    Some investment analysts have argued that company b has overpaid for the license. Market research shows most customers are extremely satisfied with their current network speed. It is therefore widely believed that this next generation of mobile phone services will not gain mainstream popularity until 20×6 at the earliest. Under the terms of purchase company b is prohibited from selling the license to other mobile phone operators.

    The year end for comp b is 30th April 20×4.
    The requirement is how would we account for this in the year ending 30th april 20×4

    May 6, 2015 at 11:09 pm #244458
    shaina
    Member
    • Topics: 14
    • Replies: 12
    • ☆

    Thank you

    May 7, 2015 at 6:12 am #244495
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    Paragraph one tells me that company B “bids for a license ……” but doesn’t indicate whether the bid was successful! From the rest of your post, I assume the bid was indeed successful and company B now has an intangible asset. This is an asset that will only start to contribute to profits in 2015 and that cannot be sold.

    And your question is “At what value should the investment in the license be shown?”. Am I correct so far?

    Initially (on date of purchase 1 May, 2013) record the purchase at cost but don’t amortise it.

    At the year end, ask “Are there any indications of impairment?” and apparently market research (inconclusively) suggests that the asset IS impaired.

    Calculate recoverable amount (higher of value in use and net selling price)

    But net selling price is $Nil so turn to value in use. And here’s a problem!

    It’s a problem because market research suggests that “mainstream popularity” will not be gained until one year later than anticipated. Ok, delay the cash flows for one year in the calculation of value in use.

    Now compare with carrying value and, if value in use is lower than carrying value, impair down to recoverable amount

    Does that answer it for you?

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