Question

Organic Product Ltd has spent $650 000 this year on a project to develop a new range of chemical-free cosmetics. It is yet too early for Organic Product Ltd’s management to be able to predict whether this project will prove to be commercially successful.
Required:
Explain whether Organic Product Ltd should recognise this expenditure as an asset, justifying your answer by reference to the AASB Conceptual Framework asset definition and recognition criteria.
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Answer 1

As here, Organic Product Ltd spent 650000 $ as Research Expenditures, as per situation and phase of R & D it is stated by the researchers team of the company , that at this stage of research it is not predictable whether the developed product is commercially viable or not.

As per IFRS 36 Intangible Assets, In order to record any development expenses as an intangible asset, only if the following conditions are satisfied

1. Technologically Viable

2. Management has Intention to complete the project

3. Probable Future economic benefit

4. Availability of Adequate Technology

5. Ability to Sell

From Above conditions enlisted above, none of the conditions is fulfilled by the Management of the Organic Product Ltd, Although Such conditions are required to be fulfilled as “ ALL CONDITIONS” and exceptions or relaxation in mandatory satisfaction of the above conditions.

Hence, from Above explanation it is advisable to record the above expenses as Research expenses and shall be charge to Income.

However, On the satisfaction of above conditions then such development expenses will only be part of Intangible assets and not research expenses.