Easy Books Ltd is an Australian mail-order company. Although the sector in Australia is growing slowly, Easy Books Ltd has reported significant increases in sales and net income in recent years. While sales increased from $100 million in 2009 to $240 million in 2018, profit increased from $6 million to $24 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 $700 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, Easy Books 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 Easy Books 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, Easy Books Ltd capitalises the costs of its direct mailings to prospective customers ($8.4 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, Easy Books Ltd purchased a customer list from a competitor for $1.6 million on 4 July 2019. This list is also recognised as a non-current asset. Easy Books 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. Easy Books Ltd’s 2018 statement of financial position also reported $15 million of marketing costs as non-current assets. If the company had expensed marketing costs as incurred, 2018 net income would have been $20 million instead of the reported $24 million. The concerned investors are uneasy about this capitalisation of marketing costs, as they believe that Easy Books Ltd’s marketing practices are relatively easy to replicate. However, Easy Books 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.
How should Easy Books Ltd’s account for its costs for under AASB 138/IAS 38 Intangible Assets. Please give substantiated reasons for your answer. There should be an explanation of how Easy Books Ltd should account for its costs under AASB 138 / IAS 38 Intangible Assets and provide reasons for how Easy Books Ltd should account for its costs under AASB 138 / IAS 38 Intangible Assets.