Question

^{28. Trecek Corporation incurs research and development costs of $650,000 in 2017, 30 percent of which relate to development activities subsequent to IAS 36 criteria having been met that indicate an intangible asset has been created. The newly developed product is brought to market in January 2018 and is expected to generate sales revenue for 10 years. a. Determine the appropriate accounting for research and development costs for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS. b. Prepare the entry(ies) that Trecek would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.}

Answer 1

As per IAS 38 Intangible assets research expenditure is not capitalized but has to be shown as expense as and when incurred. Also, development expenses are recognized as an intangible asset if the conditions (given in the IAS 38) are met. DR Date Particulars 31-12-2017 Research and development expense $4,55,000.00 Deferred development costs intangible assets) $1,95,000.00 Cash $6,50,000.00 To recognize a portion of research and development expenditure as expense and capitalize a portion as an intangible asset. 31-12-2017 Research and development expense $ 6,50,000.00 Cash $ 6,50,000.00 To recognize a portion of research and development expenditure as expense and capitalize a portion as an intangible asset To convert from US GAAP to IFRS, the development expense which is recognized as expense as per US GAAP will have to be recognized as capital expense under IFRS. The conversion entry is as follows. DR Date Particulars 31-12-2017 Deferred development costs (intangible assets) $1,95,000.00 Research and development expense $1,95,000.00 To recognize a portion of research and development expenditure as expense and capitalize a portion as an intangible asset. 01-01-2018 Amortization expense Deferred development costs (intangible assets) Retained earnings $ 19,500.00 $1,75,500.00 $1,95,000.00 With this adjustment entry, amortization expense (19500) is recorded as per IFRS and the balance still remains in the deferred development costs (175500) which goes to retained earnings account as above.