Case study report – theory and calculations – individual assessment

Assessment 2 Assessment Type: Case study report – theory and calculations – individual assessment

Purpose: To allow students to apply the technical knowledge of relevant accounting standards to financial reporting settings. This assessment relates to learning outcomes c, d. Value: 30%

Due Date: Week 9 – 8:00 pm Wednesday of Week 9

Submission: Submission must be made to the Moodle Assignment Link on the KOI Moodle Subject Home Page by 8.00 pm Wednesday of Week 9. A printed copy must be submitted to the Lecturer at the Week 9 Lecture to assist with marking. All assignments must have a signed KOI Assignment Coversheet included with the submission.

Topic: Research Individual Assignment

Task Details: Mags Ltd is an Australian mail-order company. Although the sector in Australia is growing slowly, Mags Ltd has reported significant increases in sales and net income in recent years. While sales increased from $50 million in 2009 to $120 million in 2018, profit increased from $3 million to $12 million over the same period. The stock market and analysts believe that the company’s future is very promising. In early 2019, the company was valued at $350 million, which was three times 2018 sales and 26 times estimated 2019 profit.

Company management and many investors attribute the company’s success to its marketing flair and expertise. Instead of competing on price, Mags Ltd prefers to focus on service and innovation, including: •

free delivery • a free gift with orders over $200.

As a result of such innovations, customers accept prices that are 60% above those of competitors, and Mags maintains a gross profit margin of around 40%.

Nevertheless, some investors have doubts about the company as they are uneasy about certain accounting policies the company has adopted. For example, Mags Ltd capitalises the costs of its direct mailings to prospective customers ($4.2 million at 30 June 2018) and amortises them on a straight-line basis over 3 years. This practice is considered to be questionable as there is no guarantee that customers will be obtained and retained from direct mailings.

In addition to the mailing lists developed by in-house marketing staff, Mags Ltd purchased a customer list from a competitor for $800 000 on 4 July 2019. This list is also recognised as a non-current asset. Mags Ltd estimates that this list will generate sales for at least another 2 years, more likely another 3 years. The company also plans to add names, obtained from a phone survey conducted in August 2019, to the list. These extra names are expected to extend the list’s useful life by another year.

Mags Ltd.’s 2018 statement of financial position also reported $7.5 million of marketing costs as noncurrent assets. If the company had expensed marketing costs as incurred, 2018 net income would have been $10 million instead of the reported $12 million. The concerned investors are uneasy about this capitalisation of marketing costs, as they believe that Mags Ltd.’s marketing practices are relatively easy to replicate. However, Mags Ltd argues that its accounting is appropriate. Marketing costs are amortised at an accelerated rate (55% in year 1, 29% in year 2, and 16% in year 3), based on 25 years’ knowledge and experience of customer purchasing behaviour.

Required: Discuss the requirements under AASB138 / IAS 38 Intangible Assets how Mag Ltd should account for the costs. Provide reasons for your answer in reference to relevant paragraphs of AASB138 / IAS 38.

Research requirements: Students need to support their analysis with reference to relevant material from the text and a minimum of eight (8) suitable, reliable, current and academically acceptable sources – this should include at least 2 peer-reviewed academic journal articles.

Presentation: 2000 + 10% word short report format. Title page, executive summary, table of contents, appropriate headings and sub-headings, recommendations/findings/conclusions, in-text referencing and reference list (Harvard – Anglia style), attachments if relevant. Single spaced, font Times New Roman 12pt, Calibri 11 pt or Arial 10 pt.

Marking Guide:

Interpretation and representation 20%

Calculations 20%

Analysis20%

Assumptions20%

Communication 20%

Total mark will be scaled to a mark out of 30 subject marks.

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