Question

QUESTION 1

As a distributor, SH Bhd has to make sure that healthcare provider prescribes gets to the right hospital, pharmacy or other healthcare facility safely, securely and reliably. Thus, for the past 10 months, SH Bhd has been conducting a research in developing a revolutionary new system to enhance the efficiency of its existing distribution system. SH Bhd believes this project will be a successful one and there are a few distributors companies who also show their interest to buy this system. The cost to patent this system when its ready is estimated at RM70,000. So far, SH Bhd has incurred RM175,000 to finance this project. However, as of company’s year-end (31 December), this new system has not been marketed. This is due to an error which requires substantial amount of work by the researchers to fix the problem

REQUIRED:

Explain the accounting treatment for the cost incurred by SH Bhd to develop new distribution system in accordance to MFRS 138 Intangible Assets. Prepare the journal entry to record the transaction for SH Bhd.

Answer 1

An intangible asset that arises from internal development can be recognized only if the all of the following are demonstrated:

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

2. The intention to complete and use or sell it

3. Ability to use or sell the intangible asset

4. How the intangible asset will generate probable economic benefits. The entity also must demonstrate the existence of a market for the intangible asset developed or if it is to be used internally, the usefulness of the asset.

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

6. The ability to measure the expenditure attributable to the intangible asset in a reliable manner.

The company in this given case does not meet any of the conditions to capitalize the internally generated asset. The company is not able to demonstrate that there exists a well defined market for the asset although only a few distributor companies have shown interest. Also there is an error in the asset which has to be fixed by the research team which implies that it is not marketable. The product is yet complete and cannot be used internally or sold. Hence the expenditure incurred so far is treated as research and development expenses.

Journal entry

Research and development expenses ..... 175,000

Cash 175,000