Question

In: Accounting

Jet Li Berhad (JLB) has built an offshore wind farm with the purpose of testing the...

Jet Li Berhad (JLB) has built an offshore wind farm with the purpose of testing the efficiency of its prototype wind turbines. JLB has applied to the authority for approval for production of its new prototype but has only received permission to test the prototype wind turbine. The wind farm development will enable JLB to test the reliability of the new wind turbines which should assist in developing more efficient and cost effective offshore wind turbines but as yet, there has not been any commercial production of the prototype wind turbines as there is still some slight doubt over the durability of the wind turbine in extreme weather conditions. The renewable energy generated during the testing phase of the wind turbines is sold to the national regulator of electricity. There is sufficient resource to complete the wind farm project but the energy income has not been included in management’s resource planning. The Board of Directors of JLB wishes to know how the expenditure on the wind farm and the income from the sale of energy should be treated in the financial statements.

Required :

As the accountant of Jet Li Berhad, advise the Board of Directors regarding the recognition of development costs and the income from the sale of energy in the financial statements in accordance to MFRS 138 Intangible Assets.

Solutions

Expert Solution

Development is 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.
Development expenditure that relates to an in-process research or development project acquired separately or in a business combination and recognised as an intangible asset if it can demonstrate conditions imposed like :

(a)

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

(b)

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

(c)

its ability to use or sell the intangible asset.

(d)

how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

(e)

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

(f)

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

As per Para 31 of the standard, ,the income and related expenses of incidental operations are recognised immediately in profit or loss, and included in their respective classifications of income and expense. Thus  income from the sale of energy  shall be taxed accordingly.

Hop this helps !!


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