Question

Future Plus Ltd is a biotechnology company that was listed on the Australian Securities Exchange on 1 July 2018 following a very successful initial public offering of shares. The company is involved in research and the commercialisation of recent medical breakthroughs.
Its managing director is Professor Tony Theodore, a world-renowned figure in medical and biotechnology research. The board of directors of Future Plus Ltd is about to discuss the preparation of financial statements for the company’s first year of operations (year ended 30 June 2019).
The managing director has put forward the following views about the Company’s financial statements:
• The entire company and its staff, whether security officers, secretaries or researchers, is focused on the company’s mission of commercialising research. Hence, the entire $30 million of non-capital spending during the year has contributed to the development of intellectual capital in the company.

As the market value of the company ($250 million) far exceeds the company’s book value, it is clear that all expenditures in the current year have added value to the company and should be capitalised as intellectual capital. The managing director expects further market value increases in the future and thus sees no reason for any amortisation of these capitalised amounts.

• The company is currently working on three research projects, and expenditures directly related to these projects total $18 million. Despite some setbacks on one project, the managing director is ‘supremely confident’ that all projects will be brought to a successful conclusion. As yet, no projects have reached the stage of starting commercial production.

Required:
Write a brief report to the board of directors evaluating the managing director’s views in light of relevant accounting standards.

Answer 1

To,

The Board of Directors,

Future Plus Ltd.

Subject: Breif Report On Accounting Aspects on the Research Expenses incurred by the Company & opinion on the Managing Director's view point

We have been advised to evaluate the Managing Director's views while highlighting the relevant accounting standards applicable in our case , specifically for a Biotechnology Company, which incur huge cost on research before commercial product of particular medicine.

Under the US GAPP (Generally Accepted Accounting Principles) the Research Expenses are to shown as expenses in the fiscal year in which these are spent. Same rules are applied in IFRS ie International Financial Report Systems. As our Company is listed at ASE, we are subject of IFRS laws also. From the legal perspectives, its very much clear that whatever expressed by Managing Director to capitalise all the Research Expenses (Direct assigned) & the other Staff Salary who are involved for the same objectives, must be capitalised is not correct views as per law prevailing in our country and as per International Financial Reporting Systems too.

But, if all these & more particularly research related team expenses if are not capitalised, it will not be perfect disclosure from other angles. As the Research Expenses will turn ultimately into Intellectual Property of the Company as and when reach at the fianl target of commercial production and company will get benefits of these expenditure for a longer term, the views are that We can capitalise the Direct Research related expense, as mentioned in question is $ 18 million (Related to 3 projects) must be capitalised. It will be fair to capitalise on the directly research related expenses showing them Capital Work in Progress. However , before the tax authorities the Company will have to prove that assets in development will become commercially viable and will be able to generate huge revenue for long term period when completed. Its a fair opinion to not to capitalise the other staff expenses, which are not directly engaged in research job.

We must get ready the documents to prove our view point that Company is at an advance stage of research & likely to achieve its target in certain period of time to claim capitalisation of expense before the tax authorities.

Thanking You,

FOR: XYZ LEGAL INC.

S,P,JETHLIA

PARTNER

DATE: 30/01/2020

PLACE: BHILWARA