Question

In: Accounting

EMERGENCY PLEASE ............................................. “Research and Development Costs incurred for the development and improvement of an existing...

EMERGENCY PLEASE .............................................

“Research and Development Costs incurred for the development and improvement of an existing process or product shall be capitalised.”

Comment on the above statement based on MFRS 138: Intangible Assets.

Solutions

Expert Solution

As per MFRS 138 Intangible Assets-

Research means following-

1. Activities aimed at obtaining new knowledge

2. The search for applications of research findings or other knowledge.

3. The search for product or process alternatives

4. The formulation and design of possible new and improved product or process alternatives.

Accounting Treatment for Research Phase will be -

Costs incurred by an entity during the research phase are recognised as expenses in the period they are incurred.

Development Phase-

Costs incurred during the development phase must be capitalised if they meet all the following Six criteria-

1.The entity has the technical feasibility of completing the intangible asset so that it will be available for use or sale

2. The entity intends to complete the intangible asset and use it or sell it.

3. The entity has the ability to use or sell the intangible asset.

4. The intangible asset will generate future economic benefits.

5.The entity has adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

6. The cost incurred during development can be measured reliably.

Hence as per the  MFRS 138 above information, In the present case "Research and Development Costs incurred for the development and improvement of an existing process or product" will be treated as follows-

Research Cost incurred will be totally write off to the profit and loss account.

Development Cost Incurred can be capitalised as per  MFRS 138  only if the above mentioned Six criteria are fulfilled.


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