Thyme is a public listed company. It has been considering the accounting treatment of its intangible assets
Question:
Thyme is a public listed company. It has been considering the accounting treatment of its intangible assets and has asked for your opinion on how the matters below should be treated in its financial statements for the year to 31 March 2021.
(a) On 1 October 2020 Thyme acquired Defive, a small company that specialises in pharmaceutical drug research and development. The purchase consideration was by way of a share exchange and valued at N$35 million. The fair value of Defive’s net assets was N$15 million (excluding any items referred to below). Defive owns a patent for an established successful drug that has a remaining life of 8 years. A firm of specialist advisors, Tamary, has estimated the current value of this patent to be N$10 million; however the company is awaiting the outcome of clinical trials where the drug has been tested to treat a different illness. If the trials are successful, the value of the drug is then estimated to be N$15 million.
Also included in the company’s statement of financial position is N$2 million for medical research that has been conducted on behalf of a client.
(b) Thyme has developed and patented a new drug which has been approved for clinical use. The costs of developing the drug were N$12 million. Based on early assessments of its sales success, Tamary have estimated its market value at N$20 million.
(c) Thyme’s manufacturing facilities have recently received a favourable inspection by government medical scientists. As a result of this the company has been granted an exclusive five-year licence to manufacture and distribute a new vaccine. Although the licence had no direct cost to Thyme, its directors feel its granting is a reflection of the company’s standing and have asked Tamary to value the licence. Accordingly, they have placed a value of N$10 million on it.
(d) In the current accounting period, Thyme has spent N$3 million sending its staff on specialist training courses. Whilst these courses have been expensive, they have led to a marked improvement in production quality and staff now need less supervision. This in turn has led to an increase in revenue and cost reductions. The directors of Thyme believe these benefits will continue for at least three years and wish to treat the training costs as an asset.
(e) In December 2020, Thyme paid N$5 million for a television advertising campaign for its products that will run for 6 months from 1 January 2021 to 30 June 2021. The directors believe that increased sales as a result of the publicity will continue for two years from the start of the advertisements.
Required:
Explain how the directors of Thyme should treat the above items in the financial statements for the year to 31 March 2021.
Your should assume that the measurements given by Tamary are reliable. You are not required to consider depreciation aspects.