X Pharmaceutical Ltd. seeks your opinion in respect of following accounting transactions: Acquired a 4 year license to manufacture a specialised…
CA Final · Financial Reporting · MTP · May 2024
X Pharmaceutical Ltd. seeks your opinion in respect of following accounting transactions: Acquired a 4 year license to manufacture a specialised drug at a cost of 1,00,00,000 at the start of the year. Production commenced immediately.Also purchased another company at the start of year. As part of that acquisition, X Pharmacy Ltd. acquired a brand with a fair value of 3,00,00,000 based on sales revenue. The life of the brand is estimated at 15 years.Spent - 1,00,00,000 on an advertising campaign during the first six months. Subsequent sales have shown a significant improvement and it is expected this will continue for 3 years.It has commenced developing a new drug ‘Drug-A'. The project cost would be - 10,00,00,000. Clinical trial proved successful and such drug is expected to generate revenue over the next 5 years. Cost incurred (accumulated) till 31st March, 20X1 is 5,00,00,000. Balance cost incurred during the financial year 20X1-20X2 is 5,00,00,000.It has also commenced developing another drug 'Drug B'. It has incurred - 50,00,000 towards research expenses till 31st March, 20X2. The technological feasibility has not yet been established. Advise how the above transactions will be accounted for in the books of account of X Pharmaceutical Ltd.
Suggested Answer and Working Notes:
X Pharmaceutical Ltd. is advised as under: It should recognize the drug license as an intangible asset because it is a separate external purchase, separately identifiable asset and considered successful in respect of feasibility and probable future cash inflows. The drug license should be recorded at 1,00,00,000.It should recognize the brand as an intangible asset because it is purchased as part of acquisition and it is separately identifiable. The brand should be amortised over a period of 15 years. The brand will be recorded at 3,00,00,000.The advertisement expenses of 1,00,00,000 should be expensed off.The development cost incurred during the financial year 20X1-20X2 should be capitalised. Cost of intangible asset (Drug A) as on 31st March, 20X2 Opening cost - 5,00,00,000 Development cost - 5,00,00,000 Total cost - 10,00,00,000Research expenses of 50,00,000 incurred for developing 'Drug B' should be expensed off since technological feasibility has not yet established.
Topics: Ind AS 38
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