Question

In: Accounting

Gama-Smith, a pharmaceutical company, develops new drugs for COVID-19 with other pharmaceutical companies that have the...

Gama-Smith, a pharmaceutical company, develops new drugs for COVID-19 with other pharmaceutical companies that have the appropriate production facilities.

When Gama-Smith acquires a stake in a development project, it makes an initial payment to the other pharmaceutical company. It then makes a series of further stage payments until the drug development is complete and it has been approved by the relevant authorities. In the financial statements for the year ended 30 June 2019, Gama-Smith has treated the different stakes in the development projects as separate intangible assets because of the anticipated future economic benefits related to Gama-Smith’s ownership of the drug rights. However, in the year to 30 June 2020, the directors of Gama-Smith decided that all such intangible assets were to be expensed as research and development costs as they were unsure as to whether the payments should have been initially recognised as intangible assets. This write off was to be treated as a change in an accounting estimate

a) Explain the difference between ‘research’ and ‘development’ in the context of AASB 138 Intangible Assets without examples

b) Discuss the implications for Gama-Smith’s financial statements for both the years ended 30 June 2019 and 2020 if the recognition criteria in AASB 138 for an intangible asset were met as regards the stakes in the development projects above. Your answer should also briefly consider the implications if the recognition criteria were not met.

Solutions

Expert Solution

A) Definition as per AASB 38 Intangible Assets

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.

Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

So the simple meaning is -

Research is a learning process. This is when we try to define the ways that things work and truly understand them. This is the time for wide open questions.

Development is about achieving function. This is when we consider how we can bend the natural order of the universe to our will, to serve our purpose. This is the time for narrow focus.

B) Definition of Intangible Asset

An intangible asset is an identifiable non-monetary asset without physical substance.

The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:

(a) the definition of an intangible asset ; and

(b) the recognition criteria

An intangible asset shall be recognised if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

(b) the cost of the asset can be measured reliably.

An entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset.

An entity uses judgment to assess the degree of certainty attached to the flow of future economic benefits that are attributable to the use of the asset on the basis of the evidence available at the time of initial recognition, giving greater weight to external evidence.

In the financial statements for the year ended 30 June 2019, Gama-Smith has treated the different stakes in the development projects as separate intangible assets because of the anticipated future economic benefits related to Gama-Smith’s ownership of the drug rights

However, in the year to 30 June 2020, the directors of Gama-Smith decided that all such intangible assets were to be expensed as research and development costs as they were unsure as to whether the payments should have been initially recognised as intangible assets.

An intangible asset shall be derecognised: (a) on disposal; or

(b) when no future economic benefits are expected from its use or disposal.

So if the recognition criteria are met Gama-Smith can continue capitalising the Intangible asset in the books. On the contrary if the Criteria of regonition is not met so Gama Smith have to derecognise the asset and expenses it in income statement.  


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