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Wiley IFRS: Practical Imp lementation Guide and Workbook
• The intention to complete the asset and use or sell it
• The ability to use or sell the asset
• How the asset will generate probable future economic benefit , including demonstr ating a
market for the asset's output, or for the asset itself, or the asset's usefulness
• The availability of sufficient technical, financial, and other resources to complete the devel–
opment and to use or sell the asset
• The ability to reliably measure the expenditure attributable to the asset during its develop–
ment
6.2.5 Examples of activities that may fail to be recognized as intangible assets include
• The design, construction, and testing of preuse prototypes or models
• The design of tools and jigs involving new techno logy
• The design, construction , and operation of a pilot plant that is not capable of commercial pro–
duction
• The design, construction, and testing of a chosen alternative for new or improved materials,
devices, products, systems, or processes
Practica l Insight
In order to implement the foregoi ng in practice, generally some form of business plan will be
required to demonstrate the feasibility of a project, the availabili ty of resources, and the future
cash flows that can reasonably be expected to be derived therefrom.
Practical Insight
Very often a project will commence with a research phase and after a time will evo lve into the
development phase. It will be necessary to determine at what point in time the project has so
evo lved, as expenditure up to that date will have to be recognized as an expense in the income
statement and expenditure incurred after that date can be capitalized as an intangible asset.
The use of hindsight and the resultant claim to capitalize the entire expenditure is not permis–
sible, as research expenditure must be expensed
when incurred
and the Standard does allow
the reinstatement of previously written-off costs. One is not permitted accumulate costs in an
account and then consider the nature of the entire project only when preparing the year-end
financial statements.
Case Study 2
Facts
Extreme Inc. is a newly established enterprise. It was set up by an entrepreneur who is generally
interested in the business of provid ing engineering and opera tional suppor t services to aircraft
manufacturers. Extreme Inc., through the contac ts of its owner, received a confirmed order from a well–
known aircraft manufacturer to develop new designs for ducting the air conditioning of their aircraft. For
this project, Extreme Inc. needed funds aggregating to $ 1 million. It was able to convince venture
capitalists and was able to obtain funding of $ I million from two Silicon Valley venture capitalists.
The expenditures Extreme Inc. incurred in pursuance of its research and development projec t follow, in
chronological order:
• January 15, 20X5: Paid $175,000 toward salaries of the technicians (engineers and consultants)
• March 3 I, 20X5: Incurred $250,000 toward cost of developing the duct and producing the test
model
• June IS, 20X5: Paid an additional $300,000 for revising the ducting process to ensure that product
could be introduced in the market
• August 15, 20X5: Developed, at a cost of $80,000, the first model (prototype) and tested it with
the air conditioners to ensure its compatibility
• October 30, 20X5: A focus group of other engineering providers was invited to a conference for
the introduction of this new product. Cost of the conference aggregated to $50,000.