Question

Answer in just 200 words please.

Case Study

As a professional accountant, you work for Optimistic Ltd. Optimistic Ltd was incorporated with the objective of developing designer drugs to meet the needs of an ageing population. In reviewing the company’s draft financial statements for the year ended 30 June 2017, you detected the following:

Your manager has capitalised $1,000,000 of research expenditure as research and development. This expenditure is clearly “research” as per the definition in AASB138

As per AASB 138:

No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred. In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred. Therefore this type of expenditure is to be expensed immediately as per the requirements of AASB 138 Intangible Assets.

• If this research expenditure had been recorded as per the requirements of AASB 138, the company would have made a loss of $500,000.

• You are also aware that your manager stands to receive a generous bonus for meeting prescribed profit targets.

QUESTION:

In your capacity as a professional accountant, how would you personally handle this situation – what would be your first step, second step, etc?

In your response, consider the Code of Ethics for Professional Accountants and how you intend to resolve the situation.

Answer 1

Since the professional accountant is bound to act with integrity and honesty, I would take necessary measures to ensure that the incorrect accounting of the research expense is corrected by bringing it to the notice of those charged with governance. The incorrect application of an accounting standard should not be allowed under any circumstance. The professional accountant must be objective and at must adequately ensure that he is not influenced unduly by others or have any conflict of interests. Hence, he must ensure that the company correctly disclose such expense instead of capitalising the same. The professional accountant is also required to possess adequate professional competence and due care during the performance of his duties as a professional accountant. This requires the accountant to act diligently in adherence with the applicable professional and ethical standards issued by the competent authority from time to time. Hence it becomes all the more imperative on the part of the professional accountant to adequately evaluate the transactions based on the standards and report any deviations of the same. The professional accountant is also bound to showcase professional behaviour and conduct at all times by complying with the existing laws and regulations at all times.