Beta Drug and Chemical Ltd is undertaking a number of research and development projects,
including the following project. Beta has been in the industry for a long time and has a
network of suppliers / retailers it can rely on for any new product introduced.
Project Interion:
2018: A new organic compound, DTT-phenol, has been discovered and there is a lot of interest
in what this new compound can do. Beta spends $200,000 on various costs to synthesise and
test what this new compound can offer.
2019: One particular property of this compound that has piqued the interest of Beta is the
compound’s property to stimulate orchids to grow more robustly, by improving the
photosynthesis process in orchids. Hence, Beta has used the compound to develop a new
fertiliser for orchids. Tests have shown that the new fertiliser greatly improves the
appearance and colouring of orchid flowers. The fertiliser will enable production of premium
orchids, which fetches high prices in the flower market. There is significant demand for
orchids worldwide and the market is worth at least 1 billion dollars per year. Beta is confident
of the techniques it uses to produce the fertiliser and commercial production can start at the
beginning of next year. After determining that the fertiliser is ready for production, they have
spent $1,000,000 in the process to do some additional testing.
2020: Beta successfully manufactures the new fertiliser and offers the new fertiliser on the
market. The response has been very positive from the market. They also incur $500,000 in
this year to further improve the fertiliser.
REQUIRED:
Determine the total amount of research and development costs that should be recognised as
an internally generated intangible asset, in accordance with AASB 138, at the end of each year
(2018, 2019, and 2020). Discuss and justify your answer in details.
Part A, Answer:
The principle of identify research and development is “research aimed at discovery of new knowledge or new findings; however, development aims at applying research findings to the design of potential products or construct potential prototypes and operating of pilot plant. “
In the given statement, in the year 2018, only research has commenced. As “spends $200,000 on various costs to synthesis and test” indicates only research has been conducted in this year.
Research and development (R&D) costs are not in themselves intangible assets, and research costs must be expensed as incurred. As a result, costs incurred in this year will be classified as expenses. So, the $200,000 various costs are all belong to expenses.
In the year 2019, research clearly indicates the new fertiliser has great effects on orchids flowers. The given text indicates this fertiliser is ready for production and have spent $1,000,000 in the process to do some additional testing.
Whether the expenditure belong to expenses or Intangible assets, depends on whether the expenditure meets the following items. 1. available for use or sale; 2. Intention to complete for use and sell; 3. Generate future economic benefit; 4. Have enough resources to complete development; 5. Has ability to measure future expenditures. (para. 57, AASB 138 (a)-(f))
The statement about 2019 demonstrates the fertiliser will enable production and will generate at least 1 billion per year. As a result, the amount $1,000,000 can be classified in the development phases.
In the year 2020, their development has successfully met the manufacture, and the further $500,000 also belongs to the development phases.
In summary:
(a) Technical feasibility: beginning of 2020;
(b) Intention to complete and sell: in 2019;
(c) Ability to use or sell: in 2020;
(d) Future economic benefits (existence of a market): in 2019;
(e) Availability of resources: Beginning of the project;
(f) Ability to measure costs reliably: in 2019;
Conclusion: the criteria in para. 57 are all met at the beginning of 2020;
Therefore, costs after that can be classified as intangible assets: $ 500,000