Research and Development Expenditure

Expenditure on the research phase

Research means trying out different possibilities and checking their outcomes. It has an element of trial and error. People expect a particular outcome but are not certain about it. Examples of research expenditure are activities aimed at obtaining new knowledge, and the search for new materials, devices, products and processes.

Expenditure on research should be recognized as an expense and not as an intangible asset. The reason is that, normally, at this stage an entity cannot demonstrate that an asset exists and that future economic benefits will flow from it. The expenditure therefore does not satisfy the definition of an asset.

Examples of research activities include:

i) activities aimed at obtaining new knowledge;

ii) the search for, evaluation and final selection of, applications of research findings or other knowledge;

iii) the search for alternatives for materials, devices, products, processes, systems or services; and

iv) the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

Expenditure on the development phase

An asset resulting from development should be recognized as an intangible asset if, and only if, an entity can demonstrate all of the following:

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 asset;

4. the probability that the asset will generate future economic benefits - among other things, the entity must demonstrate the existence of a market for the output of the asset or the asset itself or, if it is to be used internally, the usefulness of the asset;

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

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

Example

AV Ltd, a pharmaceuticals company undertook a project to develop a more effective drug to fight a disease common during winters. A team of scientists was engaged to obtain new knowledge, materials and processes. The team continued to do experimentation through trial and error on various species and breeds of animals. The amount expensed during the phase was $5 million. This is a research phase, and expenditure incurred during this phase is charged to the SOCI.

Later, AV Ltd arrived at a unique proven formula. The processes were drafted and identified. Testing was done repeatedly and on a large scale. Patents were registered for the process. AV Ltd certainly could now complete the project and exploit it commercially, and that the improved cost-effective formula will generate substantial sales.

The recognition criteria for development are met at this stage. This is a development phase. Expenditure on this phase amounted to $15 million are capitalized as intangible assets.

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognized as intangible assets. The reason is that expenditure on these items cannot be distinguished from the cost of developing the business as a whole

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CIMA SCS Nov 2017 Steelcast - Ethical Isssue

Scenario 5

The management of Steelcast is of the view that they should create a limited edition watch for the premium segment. The watches can be procured for a low price material from a vendor from another country who will polish the skin of the watches to ensure that the shine remains for a considerable time period. The biggest advantage of the deal is that the limited edition watches will be sold at a considerable premium, and the procurement cost would be negligible. This is certain to create a huge positive financial benefit to the company.

However, the company would like to have the words "Made in Highland" to ensure the credibility of the watches.

- Discuss the implications of the above decision from the financial view point. You need to consider both short term and long term financial implications to Steelcast's business.

- Do you think that the above decision has any ethical implications to have the words - "Made in Hiland" which is not true?

Scenario 6

The failure of the new design of the watch has resulted into a loss of significant investment without any positive returns. Steelcast's management understands that the shut down of the new unit is unavoidable now. The rumors of the shut down are already widespread and the labour at the site is having unrest about the uncertainty of their careers and job prospects. The labour laws are weak in the nation, and there is no legal implication of shutting down the unit.

How should the news of a possible shut down be communicated with the labour? What possible options are available to Steelcast's management to support the labour which is made redundant?

CIMA Gateway Exam - Nov 2017 - ZX Furniture

ZX has invested into the new office at the Central location. However, the space is taken on a long term lease. ZX does not wish to show the investments in the new office explaining that they have not owned the office, but taken it on lease only. Also, the office needs to be vacated after the lease period is over. ZX is required to give back the space to the owner in the original condition after the lease period gets over. ZX's management considers that these costs will be incurred in future, hence we do not have to worry on accounting of these costs at present.

One of the Board members is of the view that showing the investment in the new office will add a burden to the balance sheet (in form of a liability) and adversely impact the Return On Capital Employed if the new office is shown in the books.

You are required to prepare a report suggesting:

- The requirements of accounting under the lease and of the costs of vacating the premises.

- Discussing the ethical implications of not doing the right accounting for leases