Question

On 31 December 2018, Sela Plc acquired Lomo Plc which had a separately identified brand, valued at £7,600,000. In addition to this, Sela Plc also estimated at the end of 2019 that their own internally generated brand is worth £12,000,000.

A director has suggested that both figures should be recorded in the statement of financial position as intangible assets, as brands would strengthen their financial position.

Sela Plc is currently working towards a target gearing ratio in order to secure external funds for expansion. Both brands described have an indefinite life.

Requirement:

i) With reference to the above scenario, explain how these brands would be accounted for in the financial statements of Sela Plc for year ending 31 December 2019. (maximum word count 140 words)

Answer 1

Answer

In a business acquisition, brands generally are subsumed within the overall goodwill arising on the take-over of another company. However, IFRS 3, Business Combinations, allows brands to be separately recognized in the balance sheet at their fair value subject to the recognition criteria being met. Hence, in the extant case, brand, valued at £7,600,000 can be capitalized as Intangible asset.

However, IAS 38 prohibits capitalization of  ‘home-grown’ brands since these self-created brands fail both the ‘identifiable’ and ‘separable’ tests as they cannot be normally sold or transferred in their own right. Hence, in the extant case, internally generated brand worth £12,000,000 cannot be capitalized as Intangible assets.