Accounting for Research and Development Activities Textbook Reference: Deegan, C. Australian Financial Accounting 5e,

1. Accounting for Research and Development Activities Textbook Reference: Deegan, C. Australian Financial Accounting 5e, Chapter 8 (pp. 282 � 292)

2. Research and development Introduction IAS 38 applies to intangible assets generally�however there are a number of paragraphs dealing specifically with research and development Research and development May account for a large proportion of expenditure for some entities Accounting problem: will expenditure with reasonable probability provide future benefits? IAS 38 applies the simplifying assumption that all expenditure undertaken on the research component of research and development is to be expensed

3. Research Considered separately from development Generally precedes development Defined as: original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding Development Defined as: application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services prior to the commencement of commercial production or use typically involves the commercial application of knowledge generated in earlier research phases

4. Development examples The design, construction and testing of preproduction or pre-use prototypes and models The design of tools, jigs, moulds and dies involved in new technology The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production The design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes or systems

5. Research expenditure�written off as incurred IAS 38, par. 54 No intangible asset arising from research (or from the research phase of an internal project) shall be recognized. Expenditure on research shall be recognised as an expense when incurred. In justifying the above requirement: IAS 38 (par. 55) In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred.

6. Development expenditure can be deferred only if the entity can show all of the following (IAS 38, par. 57) the technical feasibility of completing the intangible asset its intention to complete the intangible asset, and use or sell it its ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits, including the existence of a market for the intangible asset or, where the intangible asset is to be used internally, its usefulness; and the availability of adequate technical, financial and other resources to complete the development; and the ability to measure reliable expenditure on the intangible asset during its development

7. Tests for deferral of development expenditure is similar to the case with other intangible assets, i.e. An intangible asset should be recognised if, and only if: it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and the cost of the asset can be measured reliably Additional key issues Where the total of the deferred development costs exceeds the expected recoverable amount, the deferred costs must be written down to the recoverable amount. (Impairment Loss) expenditure written off in one period may not be subsequently written back onto the balance sheet. General principle (IAS 38, par. 71) Expenditure on an intangible item that was initially recognized as an expense shall not be recognized as part of the cost of an intangible asset at a later date

8. Costs included as part of research and development Costs of internally generated assets (e.g. research and development) are all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management (IAS 38, par. 66) Examples of directly attributable costs are costs of materials and services used or consumed in generating the intangible asset costs of employee benefits (as defined in IAS 19 �Employee Benefits�) arising from generation of the intangible asset fees to register a legal right amortisation of patents and rights that are used to generate the intangible asset Refer to Worked Example 8.4 on page 284.

9. Amortisation of deferred development costs AASB 138 provides a number of requirements for the amortisation of intangibles, which also apply to any development expenditure that has been capitalised and deferred to future periods Amortisation can be based on (whichever is appropriate): output levels; or expiration of time. Refer to Worked Example 8.5 on page 286�Amortisation of deferred development costs Refer to Worked Example 8.6 on pp. 291-92�Calculating deferred development balances

10. Summary Research and development comprises of costs of materials and services consumed in research and development activities, salaries and wages, and depreciation of research-related equipment Research expenditure is required to be expensed as incurred Development expenditure may be carried forward as an asset to the extent that future economic benefits are deemed probable, and such benefits are measurable with reasonable accuracy Development expenditure would need to be amortised in subsequent periods

11. End of Lecture 4

12. Tutorial Questions for Week 5 Deegan, C. Australian Financial Accounting 5e, Chapter 8 Review Questions: 6, 11,19. For Tutorial Discussion Challenging Question: 34 (a-d). Ignore (e) Tutorial Assessment (Submission)