Question

Project AX

To develop a new compound in view of the anticipated shortage of raw material currently being used in one of the company’s processes. Sufficient progress has been made to suggest that new compound can be produced at a cost comparable to that of the existing raw material.

Project BX

To improve the yield of an important manufacturing operation of the company. At present material input with a cost of RM 100,000 p.a becomes contaminated in the operation and half is wasted. Sufficient progress has been made for the scientists to predict an improvement so that only 20% will be wasted.

The directors of Happy Ltd consider both projects will be successful. In addition, the company has enough finances to complete both projects and enough capacity to see both projects through to successful conclusion.

Cost incurred during the year were:

Project	AX	BX
	RM	RM
Staff salaries	15,000	10,000
Overhead (direct cost)	26,000	12,000
Plant on cost (life 10 years)	20,000	60,000

Required:

In relation to MFRS138 Intangible Assets,

1. Define
   1. Research and
   2. Development

2. Say under what circumstances it would be appropriate to defer development (capitalize) expenditure to future periods.
3. Show how the expenditure on projects AX and BX would be dealt with in the statement of financial position and statement of comprehensive income in accordance with

MFRS 138 Intangible Asset

Answer 1

Under MFRS 138, Intangible Assets covers identification, recognition, measurement and presentation of intangibles.

These assets usually have no physical existence and internal intangibles are usually classified as Research & Development.

In terms of definition, Research & Development are used in pair to cover the following:

• Activities aimed at obtaining new knowledge,
• Search for applications of research findings or other knowledge,
• Search for product or process alternatives and
• Formulation and design of possible new or improved product or process alternatives

However, their accounting treatment might differ. Costs incurred during research phase are recognized as expenses in the period they are incurred whereas costs incurred during development phase must be capitalized if they meet the eligibility criteria.

Development costs can be capitalized if they meet all the following criteria:

• The entity has the technical feasibility of completing the intangible asset so that it'll be available for use or sale,
• The entity intends to complete the intangible asset and use it or sell it.
• The entity has the ability to use or sell the intangible asset.
• The intangible asset will generate future economic benefits.
• The entity has adequate technical, financial and other resources to complete the development and to use or sell the intangible asset
• The cost incurred during development can be measured reliably.

In the above illustration, both projects are under research and the management has the intention and the resources to complete both.

Project AX specifically focuses on development of a new compound while Project BX is only research to improve existing yield.

Particulars	Project AX	Project BX
Intangible Asset Type	Development	Research
Staff Salaries (A)	15,000	10,000
Overhead (Direct Cost) (B)	26,000	12,000
Plant Cost (C)	20,000	60,000
Plant Life	10	10
Amortized Cost (D)		6,000
Capitalize Cost (A)+(B)+(C)	61,000
Expense Cost (A)+(B)+(D)		28,000

Material wastage also will be expensed off in the P&L.