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Risk on Brand and useful life

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AAA Exams › Risk on Brand and useful life

  • This topic has 6 replies, 2 voices, and was last updated 1 year ago by Kim Smith.
Viewing 7 posts - 1 through 7 (of 7 total)
  • Author
    Posts
  • August 4, 2023 at 8:33 pm #689387
    nk16
    Participant
    • Topics: 71
    • Replies: 39
    • ☆☆

    How do we get to know if the brand has indefinite useful life or finite useful life. What are the indicator to the know the useful life of brand. And also the brand with indefinite useful life undergo for impairment review are fully written down

    August 4, 2023 at 8:51 pm #689388
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8302
    • ☆☆☆☆☆

    You can’t know for certain. I’ve written something about brands here https://opentuition.com/topic/revaluation-gain-relating-to-brand

    It’s for management to provide the evidence to support their estimates e.g. an indefinite life would have to be backed up with advertising expenditure on the brand.

    August 5, 2023 at 9:52 am #689408
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8302
    • ☆☆☆☆☆

    I’ll get back to you after the weekend when I have the questions to hand.

    August 5, 2023 at 11:22 am #689403
    nk16
    Participant
    • Topics: 71
    • Replies: 39
    • ☆☆

    Am confused because two different question on risk for brand that is indefinite or finite useful life how did they identify.

    QN )ADAMS GROUP (june 2014) kaplan qn 14
    Scenerio
    The Group has a policy of non-amortisation of the Adams brand name. The brand name was
    acquired many years ago and is recognised at its original cost. The previous audit firm
    accepted the policy due to the strength of the brand name and the fact that the Group spends
    a significant amount each year on product development and marketing aimed at supporting
    the brand.

    During the year, the Group attracted negative publicity when an investigation by a wellknown journalist alleged that child-labour was being used by several suppliers of raw
    materials to Lynott Co.

    Answer
    The brand of $8 million is material. It is recognised in the statement of financial
    position as an intangible asset which is appropriate given that the brand is a purchased
    intangible asset. However, the asset is recognised at its original cost and there is risk
    attached to the policy of non-amortisation of the brand.

    IAS 38 Intangible Assets states that an intangible asset with a finite useful life is
    amortised, and an intangible asset with an indefinite useful life is not. The risk is that
    the assumption that the brand has an indefinite life is not correct, and that the asset
    is overstated and operating expenses understated through the lack of an annual
    amortisation charge against the asset.

    so my question is how did they identify that there is brand doesnot have indefinite useful life?

    QN 2 LAURLEY GROUP (MJ 2017 ) KAPLAN QN 10
    The Group produces cosmetics and beauty products which are sold under various brand
    names in more than 100 countries. Most of the brand names have been acquired with
    subsidiary companies

    In April 20X5, allegations were made in the press and by customers that some ingredients
    used in the Chico perfume range can cause skin irritations and more serious health problems.
    As a result, the Chico products have been withdrawn from sale and a $30 million impairment
    charge has been recognised in respect of the Chico brand name. Despite this issue, Group
    revenues have increased by 13% and Group management is confident that no other brands
    are affected.
    Acquired brand names are held at cost with no amortisation being charged on the
    grounds that the assets have an indefinite life. An annual impairment review is
    conducted on all brand names. A $30 million impairment has been recognised in
    respect of the Chico brand name as discussed above.

    ANSWER
    The audit team will need to verify whether the $30 million impairment recognised in
    relation to the Chico brand name is a full impairment of the amount recognised in
    relation to that specific brand within intangible assets. Given that the branded
    products have been withdrawn from sale, it should be fully written off. If any amount
    remains recognised, then intangible assets and operating profit will be overstated.
    The impairment charge of $30 million is highly material by reference to the threshold
    and may warrant separate disclosure. There is a risk that the necessary disclosures are
    not made in relation to the discontinuance and/or the impairment of assets.

    They didnot mention about the risk that the brand is not indefinte while they agreed as indefinite ..why ? how is this brand an indefinite useful life and not the previous adams question ?

    August 5, 2023 at 12:28 pm #689415
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8302
    • ☆☆☆☆☆

    In Adams, the negative publicity damages the brand name, which casts doubt on the indefinite useful life assumption.

    An intangible that is not amortised is tested annually for impairment. If the impairment of Chico writes it down to $0 or a very small amount, its useful life is irrelevant since there is nothing/next to nothing to amortise/impair in future.

    August 7, 2023 at 3:49 pm #689538
    nk16
    Participant
    • Topics: 71
    • Replies: 39
    • ☆☆

    Did you check the question on brands for adams group and laurel group so why in laurel group they recognised as indefinite useful life

    August 7, 2023 at 4:55 pm #689547
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8302
    • ☆☆☆☆☆

    I don’t know what it is you don’t understand. If useful life is indefinite it’s tested annually and any loss in value is expense. If definite, expense is annual depreciation.

    If indefinite and impaired, useful life could be an issue because management may cut back on expense that would otherwise maintain its value.

    But this is a “non-issue” if carrying amount is nil/immaterial.

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