Question

In: Accounting

“Expenditure on research shall not give rise to an asset but rather must be expensed.” Please...

“Expenditure on research shall not give rise to an asset but rather must be expensed.” Please justify your answer associated with the definition of an asset.

Solutions

Expert Solution

An asset is defined as an economic resource from which future economic benefits are expected to flow to the entity. Research is defiined as "original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding".

Since, research is just an activity of investigation, study and observations, it does not guarantee that research outcomes will provide future economic benefits to the entity. For Example : A Pharma Co. researches on a new drug for a disease, however they found that this drug is not effective on that disease. Hence, it cannot be commercialised or sold to market. Thus, economic benefit is not derivable from this research and hence cannot be recognised as asset.

Most of the Internation Accounting bodies has given the same view. IAS 38 (IFRS), Ind AS 38 (India), etc. states that "Charge all research cost to expense". It can only be capitalised and recorded as an asset when the research enters the Development Phase.  These costs are capitalised only after technical and commercial feasibility of the asset for sale or use have been established. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. It is clear that once a research activity has technical and commercial feasibility, can be sold or used, entity will complete it, then it has entered the development phase wherein future economic benifits are expected. Hence, it can be recognised as "Intangible Asset under Development" in Asset.

Thus, it is justified that "Expenditure on research shall not give rise to an asset but rather must be expensed".


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