Toll Company (a Concession Company) (Toll) has been given a 10-year license from
ID: 2464393 • Letter: T
Question
Toll Company (a Concession Company) (Toll) has been given a 10-year license from the government to operate a new toll road that connects the road network to a new town. Toll is responsible for Expressway Development Expenditures (EDEs). EDEs include development and upgrading (design and construction) expenditures, including interest charges relating to the financing of the development incurred in connection with the expressway concession. The EDEs have an original cost of $100,000. At the end of 10 years, the rights to the toll road revert back to the government. It is expected that the population of the town will grow at a fairly substantial rate over the next 10 years. Thus, the traffic flow is also expected to increase.
Toll is trying to determine the most appropriate method to amortize the cost of the EDEs. Methods being considered by Toll are the straight-line method and the units-of-production method based on usage and the units-of-production method based on revenue. Most firms in the industry calculate the annual amortization expense under the revenue-based-units-of-production method as follows:
Actual revenue for the year
Amortization expense = * Net book value of EDE, beginning of the year
Actual revenue for the year +
projected revenue for the
subsequent years to the end
of the concession period
Toll anticipates charging $1.00 per car in year 1 and increasing 10 centsper year until the rate is $1.90 in year 10. The schedule below details their expected and actual usage throughout the 10-year period.
Year
Expected tolls
Actual tolls
1
5,000
4,500
2
7,000
6,000
3
9,000
8,000
4
11,000
10,500
5
12,000
12,000
6
14,000
14,500
7
15,500
16,000
8
16,000
17,000
9
17,000
18,000
10
18,500
20,000
Part I
Required
Obtain and review ASC 350-30, Intangibles – Goodwill and Other-General Intangibles Other than Goodwill, and IAS 38, Intangible Assets.For purposes of Part I, assume the amendment to IAS 38, Clarification of Acceptable Methods of Depreciation and Amortization, (issued in May 2014) is not yet effective for the Toll Company.
Review and discuss what the general rules are related to the amortization method of this intangible asset.
Determine the amortization expense for Toll’s license over the next 10 years under each of these methods.
What method would you recommend that Toll use? Explain why you believe that method is the best. Do you believe that the other methods are reasonable? Why or why not?
Do you believe that the current standards are too rules based, too principles based or do you believe that they are appropriate? Explain your answer.
Part II
Required
Obtain and review the IASB amendment to IAS 38, Clarification of Acceptable Methods of Depreciation and Amortization (issued in May 2014). This guidance is effective prospectively for annual periods beginning on or after January 1, 2016. Note: early adoption is permitted.
Once this guidance is effective, how will this impact the choice of amortization methods? How does this change further convergence with US GAAP?
Explanation / Answer
Answer: I recommend Toll company to use the straight line based on usage method. I recommend this method because, firstly, Toll doesn’t own a license, so this is the most beneficial method. I think other methods are reasonable but this is the best.
Both GAAP or IFRS could be appropriate here, I think if one wanted the easy way out that they would use the IFRS approach because it only requires a one step method instead of an additional step.
More rules-based.
Part II
Answer:There are expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset.
Advertising Cost : Under IFRS Advertising are expensed as incurred.
Under GAAP Advertising costs are expensed when the advertising takes place for the first time.
Development Costs :
Under IFRS, Development costs are capitalized.
Under GAAP, Development costs are expensed.
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