Question

Dax Pharmaceuticals incurred the following costs in year 1 related to a new cancer drug: Research for new formulas Development of a new formula Legal and filing fees for a patent for the new formula Total $3,475,000 2,800,000 80,000 $6,355,000 The development costs were incurred after technological and commercial feasibility was established and after the future economic benefits were deemed probable. The project was successfully completed and the new drug was patented before the end of year 1 fiscal year. Required: 1. Calculate the amount of research and development expense Dax should report in its year 1 income statement related to this project. 2. Repeat requirement 1 assuming that Dax prepares its financial statements according to International Financial Reporting Standards.

Answer 1

Requirement (1):

Under GAAP, ASC 730 covers the general scope of Research and Development (R&D) costs. The general rule stated here is that both Research related costs and Development related costs are charged to expense in the year when they are incurred.

Further, ASC 730-10-55-1 and 55-2 list examples of activities that are commonly included in, or excluded from, R&D activities. Under this list, a specific exclusion is provided for - 'Legal work in connection with patent applications or litigation, and the sale or licensing of patents'

Therefore, in light of the above US GAPP principles, the R&D Expense that Dax should report in its year 1 income statement related to this project is as follows:

Particulars	Amount ($)
Research for new formulas	3475000
Development of new formula	2800000
Total	6275000

Requirement 2:

Under IFRS, IAS 38 covers the general scope of Research and Development (R&D) costs. IAS 38 provides for a distinction between Research related costs and Development related costs.

• Research related costs: Like the US GAAP, these costs are charged to expense in the year when they are incurred.
• Development related costs: Unlike US GAAP, IFRS has broad-based guidance that requires companies to capitalize development expenditures, including internal costs, when certain criteria are met.
  These criteria are said to be met from the point in time that the company is able to demonstrate the technical and commercial feasibility, and also how the intangible asset will generate probable future economic benefits.
• Legal fees associated with the application and acquiring of patent are capitalized along with the patent

Therefore, in light of the above IFRS principles, the R&D Expense that Dax should report in its year 1 income statement related to this project is as follows:

Particulars	Amount ($)
Research for new formulas	3475000
Total	3475000