Since the beginning of the financial year, Large Mart has spent $100,000 to create a new...

Since the beginning of the financial year, Large Mart has spent $100,000 to create a new computer program that is able to automatically summarise the content of a university lecture without any manual work being required by students. Large Mart decided to undertake this project because its programming department knew it had the technical knowledge to develop the program successfully, and college students had previously expressed strong interest to purchase such a program. This week, the program has been completed and it will go on sale next week. The Large Mart accounting department is unsure if the $100,000 that was spent on the creation of the program is regarded as a development or research cost. As a result, the accounting department is also unsure how to account for the monies spent on the creation of the program.

1) Provide a detailed discussion of the difference between development and research expenditures, and explain what criteria must be used to distinguish between development and research expenditures in the Australian financial accounting environment.

2) Determine if the creation of the program represents development or research expenditure, using a detailed evaluation of the criteria you have identified in question 1, and explain how the funds spent on the creation of the program should be accounted for

Expert Solution

1) No intangible asset arising from research (or from the research phase of an internal project) shall be
recognised. Expenditure on research (or on the research phase of an internal project) shall be
recognised as an expense when it is incurred. In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that
will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense
when it is incurred.

Where as, An intangible asset arising from development (or from the development phase of an internal project)
shall be recognised if, and only if, an entity can demonstrate all of the following:
(a) the technical feasibility of completing the intangible asset so that it will be available for use
or sale.
(b) its intention to complete the intangible asset and use or sell it.
(c) its ability to use or sell the intangible asset.
(d) how the intangible asset will generate probable future economic benefits. Among other
things, the entity can demonstrate the existence of a market for the output of the intangible
asset or the intangible asset itself or, if it is to be used internally, the usefulness of the
intangible asset.
(e) the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
(f) its ability to measure reliably the expenditure attributable to the intangible asset during its
development.

2) Thus the amount spent on creation of new computer program which will be sent for sale next week, is to be recognised as a development. The development of computer program is completed & it is available for sale. The Program will also generate future economic benefits to the entity on its sale. Hence, the fund spent on the creation of the program must be recognised as an intangible asset in the financial statements.

ekkarill92 answered 2 months ago

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