Question

FARS Research Case

VTech is an Enterprise Resource Planning (ERP) software development corporation that specializes in providing technological solutions for firms to better manage their businesses. Being in the technology industry, research, and development (R&D) is one of the largest expenditures. For example, in the second quarter of the fiscal year 2020 alone, VTech’s internal books reveal that the company has generated the following R&D expenditures directly attributable to the software they plan to develop and sell:

- Incurred $5,000,000 as an effort to establish technological feasibility of an ERP software

- Incurred $3,000,000 in production costs, after they had decided that the software is a viable product

In addition to the development of software for sale, VTech also developed specialized software that will help with their internal accounts payable system. During the fiscal quarter, the company spent $1,000,000 on the software which will be for internal use only and not for resale.

An accounting intern at the firm approaches you, the senior manager, and asked for your advice on how to properly record and recognize these expenditures. Should the firm treat all the expenditures the same? Differently?

Answer 1

As a basic rule, expenditure on development costs should be written off to the profit and loss account as incurred, as with the expenditure on research.However, under IAS 38, there is an option to defer the development expenditure and carry it forward as an intangible asset if the following criteria are met:

• there is a clearly defined project
• expenditure is separately identifiable
• the project is commercially viable
• the project is technically feasible
• project income is expected to outweigh cost
• resources are available to complete the project.

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.If an accounting policy of capitalisation is adopted it should be applied consistently to all development projects that meet that criteria.

In case of VTech, expenditure directly attributable to to the software they plan to develop and sell qualifies the above criteria.Hence, both the cost of $5,000,000 and $3,000,000 shall be capitalised in the books.

However,cost of $1,000,000 on software developed to help with internal accounts payable system should be expensed in the profit and loss as it does not qualify any of the above criteria.