On June 30, 2014, your client, Bearcat Limited, was granted two patents for plastic cartons that it had been producing and marketing profitably for the past three years. One patent covers the manufacturing process and the other covers related products.
Bearcat executives tell you that these patents represent the most significant breakthrough in the industry in the past 30 years. The products have been marketed under the registered trademarks Evertight, Duratainer, and Sealrite. Licences under the patents have already been granted by your client to other manufacturers in Canada and abroad and are producing substantial royalties.
On July 1, Bearcat began patent infringement actions against several companies whose names you recognize as substantial and prominent competitors. Bearcat's management is optin1istic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products and collection of damages for loss of profits caused by the alleged infringement.
The financial vice-president has suggested that the patents be recorded at the discounted value of expected net royalty receipts.
Instructions
(a) What is the meaning of "discounted value of expected net receipts"? Explain.
(b) How would the value in (a) be calculated for net royalty receipts?
(c) What is the accounting basis of valuation for Bearcat's patents under ASPE? Under IFRS?
(d) The financial VP has suggested the patents be recorded at the discounted value of expected net royalty receipts.
Discuss whether or not this would be allowed under IFRS.
(e) Suppose that the VP (Finance) has suggested that an asset be recognized for the infringement litigation in the financial statements. As the ethical accountant, what would you do? What is the appropriate treatment in the financial statements for the year ending September 30, 2014? Discuss.