Question

RESEARCH AND DEVELOPMENT

1) IFRS requires that firms must expense all Research and Development costs as incurred?

- If Yes: Explain your answer

-If No: Explain your answer

2). What is the reasoning used by the IASB for the treatment of research and development costs? Do you agree? Explain

Answer 1

1. IFRS Requires that firms must expense all Research & Development Costs as Incurred?

Answer: No, Under IFRS Research & Development has Separate Meaning,

Research: Costs related to original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

Development: Incurred in 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.

Under IFRS Research Costs are Expensed as and when they are incurred. Whereas the development costs are capitalized where the firms can explain the following elements:

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

2. Its intention to complete the intangible asset and use or sell it.

3. Its ability to use or sell the intangible asset.

4. How the intangible asset will generate probable future economic benefits.

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

6. Its ability to reliably measure the expenditure attributable to the intangible asset during its development.

2. What is the reasoning used by the IASB for the treatment of research & development costs?

Answer: The treatment for research and development costs are not included separately and they are included in the standard for intangible assets.

It states the recognition criteria as only when the following conditions are met:

1. When Probable future economic benefits flow from the asset to the entity and

2. cost of the asset can be reliably measured.

The IASB separates the R&D Projects into Research & Development Phases.

It is not possible to determine whether the future economic benefits flow to the entity in the research phase. So, the total research expense will be expensed.

Whereas the development expense can be capitalized when the conditions are met:

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

2. Intention to complete and use or sell the asset

3. Ability to use or sell the asset

4. Existence of a market or, if to be used internally, the usefulness of the asset

5. Availability of adequate technical, financial, and other resources to complete the asset

6. The cost of the asset can be measured reliably.