Mags Ltd is an Australian mail-order company. Although the sector in Australia is growing slowly,…

 
   

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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 non-

current 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.