Question

Builders Supplies Ltd has undertaken a project to develop an online sales team.  The project involves all sales representatives being equipped with:

• Computers that are linked to the company’s inventory records for paperless placing and confirming of orders; and
• Hologram-projecting equipment which can project an accurate, detailed three-dimensional image of every stock item at the premises of customers.

The costs incurred in the current period (2017) on this project were:

            computer equipment (life five years, zero residual value)               $ 1,000,000

            software development                                                                        380,000

            consultant’s fees (for implementation and testing)                               620,000

The project has been successfully generated and is now in the process of being implemented.  The project has a ‘go-live’ date of 1 August 2017. Builders Supplies Ltd is hoping to sell the technology to other companies.

Required:

For the reporting period ended 30 June 2017, applying the provisions of AASB 138:

1. Identify the amount of research recognised as an expense;
2. Identify the amount of development recognised as an expense; and
3. Identify the amount of development capitalised.

Answer 1

a.) In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure shall be treated as an expense when it is incurred.

In this project , there is no research cost.

b) .An intangible asset arising from the development phase of an internal project shall be recognized if, and only if, an entity can demonstrate the following:

(1) the technical feasibility of completing the intangible asset so that it will be available for use or sale.

(2) its intention to complete the intangible asset and use or sell it.

(3) how the intangible asset will generate probable future economic benefits.

(4) its ability to measure reliably the expenditure attributable to the intangible asset during its development.

It is clear that the software development cost and consultation fees are met the above recognition conditions.  

Therefore , all the above costs are recognized as intangible assets and there is no development cost recognized as expenses.

c. ) The amount of development capitalized = ( $ 380,000 + $ 620,000 ) = $ 1,000,000