Question

In the year 2020, in a project to develop a new product, Topeka Company incurred research and development costs totaling $7,000,000. Topeka management is able to clearly distinguish the research phase from the development phase of the project. Research-phase costs are $4,000,000, and development-phase costs are $3,000,000. The IAS 38 criteria have been met for recognition of 50% of the development costs as an asset. The new product was brought to market at the beginning of 2021 and is expected to be marketable for 10 years. (Ignore income tax effects.)

1.Determine the impact the research and development costs have on Topeka Company's income statement for the years 2020, 2021 and 2022 for both U.S. GAAP and IFRS.

2.Summarize the difference in income, total assets and total stockholders’ equity using the two different sets of accounting rules for the years 2020, 2021 and 2022. (Keep in mind that assets and equity will have the same cumulative effect in order for the balance sheet to balance.)

3.Assume that net income for each year and total stockholders’ equity at the end of year using U.S. GAAP was the following:

Net Income Total Stockholders' Equity. 2020 2021 2022 $1,800,000 $1,350,000 $1,500,000 $10,500,000 $ 11,600,000 $13,000,000 Prepare a detailed schedule to reconcile the difference between U.S. GAAP and IFRS for net income and total stockholders' equity for the years 2020, 2021 and 2022.

Answer 1

IAS 38 means,

Accounting requirements and rules for intangible assets i.e. non monentory with or without physical presence. intangible assests are initially measured at cost and amortised on basis of useful life.

The major difference between IAS 38 and U.S. GAAP :

Recognition of development costs while U.S. GAAP requires capitalization of computer software development cost.

ANS 1) a

IFRS	YEAR1	YEAR2
Research expense	$4,000,000
Amortization expense – deferred development costs(3000000/10)		$300000

b) In case of U.S. GAAP the entire research and development are expensed in year 1 for $7,000,000. In year 2 there is no impact on income statement as the entire expense are expensed and not reported as assets.

ANS 2 :

In year 1, as per IFRS the income before taxes would be higher by $3,000,000 ($7,000,000-$4,000,000). For years 2020,2021,2020 under IFRS income before taxes would be lower by $300000 due to amortization expense on deferred development costs.

The total assets and stockholder’s equity under IFRS would be higher by following amounts for each of the years.

YEAR 2020	YEAR 2021	YEAR 2022
$3,000,000	$2,700,000	2,400,000

The above amount is decreasing due to amortization of asset by $300,000 each year.