Page 21 - MCS August Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

TASK 3 – RESEARCH AND DEVELOPMENT

MEMORANDUM
From: Financial Manager
To: Chris Klet, Non‐executive Director
Date: Monday morning
Subject: Research & Development (R&D) Department

Research & Development Costs

IAS 38 Intangible Assets (IAS 38) includes accounting requirements relating to R&D activities. IAS
38 defines an intangible asset as an identifiable non‐monetary asset without physical substance.

The fundamental principle is that research expenditure should be written off as an as an expense
as it is incurred. The reason for this is that, at the point expenditure is incurred it is not probable
that it will result in a future inflow of economic benefits.

However, some research‐related expenditure may meet the definition of development costs as
specified by IAS 38. To be classified as development costs, the costs must be capable of reliable
measurement and it must be probable that the entity will have a future inflow of economic
benefits as a result of incurring those costs. This requires that the development costs are incurred
on a project which is technically and economically feasible, and that future economic benefits will
be received, either in the form of increased sales revenues, reduced production costs or by
commercial sale of the asset.

IAS 38 requires that development costs are capitalised and amortised over the period over which
the entity expects to receive future economic benefits from those costs. Development costs must
be reviewed annually to ensure that they still meet the criteria for capitalisation. If it becomes
clear that development costs no longer meet the criteria for capitalisation, they should be written
off immediately.

On a related issue, I am aware that Montel recently development a unique mounting bracket for
use in the Professional DSLR body. This would appear to be something which, had it been
considered earlier, the development costs may have met the criteria to be capitalised in
accordance with IAS 38. The mounting bracket arguably adds value to the Professional DSLR range
of cameras.

In addition, if a patent had been obtained for the bracket design, it would protect our intellectual
property rights to prevent other manufacturers from using the bracket. Also, we would be able to
authorise production and/or use by others in exchange for a royalty fee, thus generating future
economic benefits for Montel.

KAPLAN PUBLISHING 105