Page 33 - CIMA MCS Workbook May 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Provisions may also be required if any of Jord’s products cause injury or harm to a client. This may
occur for example, if the design, manufacture or installation process has not been properly
followed.

The design, delivery and installation process would appear to be tightly controlled by Jord.
However, if there are delays in this process, leading to client dissatisfaction (particularly if a
completion date has been agreed), this may lead to claims against Jord.

Requirements of IAS 38 Intangible assets
An intangible asset (IA) is an identifiable, non‐monetary asset without physical substance. In order
to be an asset, the resource must be controlled by the entity and it must be expected that future
economic benefits will flow to the entity. To be identifiable, the asset must be either separable or
arise from contractual or other legal rights.

In order to recognise an IA in the statement of financial position, the item must meet the above
definition and it must be probable that the expected future economic benefits will flow to the
entity. The cost must also be capable of reliable measurement.

Purchased intangible assets however will normally be capitalised. Most expenditure on internally
generated IAs do not qualify for capitalisation and must be expensed as it is incurred. This is due
to the expenditure not resulting in an asset that meets the definition (in terms of being something
that can be “controlled” and “separable”) or not being able to be reliably measured.

IAS 38 also covers the treatment of research and development expenditure. Research is defined
as being work undertaken to gain new knowledge whereas development is use of knowledge to
develop new or improved products. Research expenditure should be expensed as incurred.

Development expenditure should be capitalised when all of the following criteria are met:
 Probable future benefits
 Intention to complete
 Resources available to complete
 Ability to use / sell developed item
 Technically feasible
 Expenditure is identifiable

Upon capitalisation of costs, they will be amortised upon commencement of commercial
production.

Application to Jord
IAS 38 would not appear to an immediate or significant relevance to Jord. However if Jord
developed or purchased e.g. specialist software to help the design of customer requirements,
then this may meet the definition of expenditure which would require capitalisation in
accordance with IAS 38. If Jord undertook any research activity relating to e.g. new products
which are more environmentally‐friendly, the accounting requirements of ISAS 38 may need to be
considered.

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