344 / 488
Chapter 30
/
Intangible Assets (lAS 38)
335
• December 15, 20X5 : The development phase was completed and a cash flow budge t was pre-
pared. Net profit for the year 20X5 was estimated to equal $900, 000.
Required
What is the proper accountin g treatment for the various costs incurred during 20X5 ?
Solution
Treatment of various costs incurred during 20X5 depends on whether these costs ca n be capitalized or
expensed as per [AS 38. Although [AS 38 is clear that expenses incurred during the research phase
should be expensed, it is important to note that not all development cos ts ca n be capitalized. In order to
be able to capitalize costs, strict criteria established by [AS 38 should be met. Based on the criteria
prescribed by [AS 38, these conclusions can be drawn:
(I )
It
could be argued that the technic al feasibility criterion was establi shed at the end of August
20X5 , when the first prototyp e was produced.
(2) The intention to sell or use criterion was met at the end of August 20X5 , when the sample was
tested with the air-conditioning component to ensure it function s. But it was not until October
20X5 that the product' s marketability was established. The reason is attributable to the fact that
the entity had doubts about the new models being compatible with the air cond itioners and that
the sample would need further testing, had it not functioned.
(3) In October 20X5, the existence of a market was clear ly established.
(4)
The financial feasibility and fundin g criterion was also clearly met because Extreme Inc. has
obtained a loan from venture capitalists and it had the necessary raw materials.
(5)
Extreme [nco was able to measure its cost reliably, although this point was not addressed
thoroughly in the question. Extreme Inc. can ea sily allocate labor, material, and overhead cos ts
reliably.
Therefore, the costs that were incurred before October 20X5 should be expe nsed. The total costs that
should be expe nsed
=
$175,000
+
S250,000
+
$300,000
+
S80,000
=
$805,000.
The costs eligible for capitalization are those incurre d after October 20X5. However, conference cos ts of
$50,000 would need to be expensed because they are independent from the development process.
Thus there are no total costs to be capitalized in terms of lAS 38.
7. RECOGNITION OF AN EXPENSE
The St andard requires th at all expend iture o n an int angible item be writte n off as an expe nse unl ess
it meet s the recognition cri te ria or it is acquired as part of a bu siness combi na tion and canno t be
se pa rately ide ntified, in which case it is subsumed as part of goodwill and treated in accordance
with IFRS
3.
Examples include
• Expenditure on start-up activi ties (s ta rt-up costs) or on ope ning
a
new facility or bu sin ess
(preoperative expenses )
• Expenditure on training
• Expenditure on adv ertising and promotional activities
• Expenditure on rel ocat ing or reorganizing part or all of an entity
Case Study 3
Facts
Cos ts generally incurred by a newly established entit y include
(a) Preopening costs of a busine ss facility
(b) Recipe s, secret formulas, models and designs, prototyp e
(c) Training, customer loyalty, and market share
(d) An in-house-generated accounting software
(e) The des ign of a pilot plan
(I)
Licensing, royalty, and stand-still agreeme nts
(g) Operating and broadcast rights
(h) Goodwill purchased in a business combination
(i) A company-developed patented drug approv ed for medical use
(j)
A license to manufacture a steroid by means of a government grant
(k) Cost of courses taken by management in quality engineering management
(I)
A television advertisement that will stimulate the sales in the techn ology industry