Question

Gigantic Company buys 100 percent of the outstanding company stock of Small Company. Gigantic paid a considerable amount for this new company which indicated that Small had a number of intangible assets of value that it had not previously recorded. Gigantic is attempting to determine which of these intangible assets must be identified and recorded in consolidated financial statements. Small has expended $4 million on research and development projects in recent years. Many of those have proven worthless but a few are now considered to be quite valuable. Although none of these research and development projects have yet reached the stage of technological feasibility, they are still considered to be worth $7 million at the time of the acquisition. What reporting is made of these in-process research and development projects?

Answer 1

Since none of the research & development project has reached stage of technological feasibility it can’t be reported as asset in consolidated financial statements. Following may be considered in support of above :

As per para 43 of IAS 38:

“subsequent expenditure on an in-process research or development project acquired separately or in a business combination and recognised as an intangible asset is:

(a) recognised as an expense when incurred if it is research expenditure;

(b) recognised as an expense when incurred if it is development expenditure that does not satisfy the criteria for recognition as an intangible asset in paragraph 57; and

(c) added to the carrying amount of the acquired in-process research or development project if it is development expenditure that satisfies the recognition criteria in paragraph 57.”

Para 57 has a condition where technical feasibility is established.

As per para 126 of IAS 38, Small Company entity shall disclose the aggregate amount of research and development expenditure recognised as an expense during the period.