Research and development Flashcards
What is the IAS 38 definition of research
Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding (IAS 38, para 8)
What is the IAS 38 definition of development
The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use (IAS 38, para 8)
Give 3 points regarding the accounting treatment of research
1) All research expenditure should be written off to the statement of profit or loss as it is incurred. This is in compliance wit the prudence concept
2) Research expenditure does not directly lead to future benefits and therefore it is not possible to follow the matching concept.
3) Any capital expenditure on research equipment(property, plant and equipment) should be capitalised and depreciated as normal in accordance with IAS 16
Explain the accounting treatment of development costs
According to IAS 38 Intangible assets, development costs must be capitalised as an intangible asset if they meet the definition of an intangible asset and also meet the recognition criteria.
State the recognition criteria of development costs using the PIRATE mnemonic
Probable inflow of economic benefit from the asset, whether through sales or internal cost savings
Intention to complete the asset and to use it or sell it
Reliable measurement of development costs
Adequate financial and other resources to complete the project
Technical feasability to complete the asset, so that it will be available for use or sale
Expected to be profitable - the costs of the project will be exceeded by the benefits generated
What if the PIRATE criteria for development are not met
Note: if the PIRATE criteria are not met, development expenditure must be written off to the statement of profit or loss as it is incurred
Also if research expenditure has been treated as an expense , it cannot subsequently be reinstated as an asset
Explain 3 key points regarding the subsequent treatment of capitalised development expenditure
1) the asset should be amortised over the period that is expected to benefit. This ensures that costs are matched to the revenue in the statement of profit or loss
2) Amortisation should commence with commercial production and charged over the period over which the business expects to generate economic benefits
3) Each project should be reviewed at the year end to ensure that the ‘PIRATE’ criteria are still met. If they are no longer met, the previously capitalised expenditure must be written off to the statement of profit or loss immediately.
If a policy of capitalisation is adopted, it should be applied to all projects that meet the criteria
State 3 important notes amortisation of intangible asset
1) If the useful life of an intangible asset is finite, the capitalised development costs must be amortised once commericla exploitation begins
2) The amortisation method used should reflect the pattern in which the assets economic benefits are consumed by the enterprise. If that pattern cannot be determined reliably, the straight line method should be used
3) An intangible asset with an indefinite useful life should not be amortised .
An asset has an indefinite useful life if there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the business.
Instead it should be subject to an annual impairment review
state the initial recognition and measurement of intangible assets
IAS 38 Intangible Assets says that ‘an intangible shall be measured initially at cost (IAS 383, para 24)
state the subsequent measurement of intangible assets
IAS 38 permits either the cost model or the valuation model to be used for subsequent measurement. Ift the cost model is applied, an intangible asset shall be carried at its cost, less any accumulated amortisation and any accumulated impairment losses (IAS 38,para 74)
IAS 38 disclosure requirements for development costs to be capitalised (4 points)
1) The amortisation method used and the expected period of amortisation
2)a reconciliation of they carrying amounts at the beginning and end of the period , showing new expenditure incurred, amortisation and amounts written off because a project no longer qualified for capitalisation
3)Amortisation during the period
In addition the financial statements should also disclose the total amount of research and development expenditure recognised as an expense during the period
