Question

Entity A carries out research and development on 1 July 2019 called Plan X.

In the year ended 30 June 2020, Entity A incurred costs in relation to Plan X of $2,520,000. These were incurred at the same amount each month up to 30 April 2020, when Plan X was completed. The product produced by Plan X went on sale from 1 June 2020.

Plan X had been confirmed as feasible on 1 January 2020, and the product produced by Plan X was expected to have a useful life of 10 years.  Amortisation is measured monthly.

REQUIRED:

Measure the carrying amount of the development cost of Plan X on 30 June 2020

Answer 1

An intangible asset is to be recognised if, and only if, the following criteria are met:

it is probable that future economic benefits from the asset will flow to the entity

the cost of the asset can be reliably measured.

R&D costs fall into the category of internally-generated intangible assets, and are therefore subject to specific recognition criteria.

Research is original and planned investigation, undertaken with the prospect of gaining new scientific or technical knowledge and understanding. The expenditure on research does not directly lead to future economic benefits, and capitalising such costs does not comply with the accruals concept. Therefore, the accounting treatment for all research expenditure is to write it off to the profit and loss account as incurred.

Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services, before the start of commercial production or use. An intangible asset arising from development must be capitalised if an entity can demonstrate all of the following criteria:

An intangible asset arising from development must be capitalized if an entity can demonstrate all of the following criteria: the technical feasibility of completing the intangible asset (so that it will be available for use or sale)(01.01.2020) intention to complete and use or sell the asset ability to use or sell the asset (1.06.2020) existence of a market or, if to be used internally, the usefulness of the asset availability of adequate technical, financial, and other resources to complete the asset the cost of the asset can be measured reliably(30.04.2020)

If these criteria are met, the entity may choose to either capitalise the costs, bringing them ‘on balance sheet’, or maintain the policy to write the costs off to the profit and loss account. Note that if an accounting policy of capitalisation is adopted it should be applied consistently to all development projects that meet that criteria. In the given case, Entity A incurred costs in relation to Plan X of $2,520,000 upto 30 April,2020($2,52,000 *10 month) The technical feasibility of completing the Plan X has been confirmed on 01.01.2020. Accordingly, R&D cost from 01.07.19 to 31.12.2019 i.e. $252000*6 month= $15,12,000/-to be written off in Profit &Loss A/C. Further, development cost can be capitalized from 01.01.2020 to 30.04.2020 i.e. Development cost to be capitalized= $252000*4 months=$10,08,000/- The product produced by Plan X was expected to have a useful life of 10 years. The product produced by Plan X went on sale from 1 June 2020. Accordingly, amortization should start when the asset is available for use or sell the asset i.e. from 1 June 2020. The carrying amount of the development cost of Plan X on 30 June 2020 = {10,08,000-10,08,000/10} =$9,07,200

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