INTANGIBLE ASSETS Research and development Costs

1. INTANGIBLE ASSETSResearch and development Costs R&D activities are undertaken with the view to enhancing the future economic benefits of the enterprises. Successful R&D activities result in the product or process development that can be exploited to bring in commercial benefits.

2. INTANGIBLE ASSETSResearch and development Costs • FRS138_Intangible Assets = R&D costs should comprise all costs that are directly attributable to R&D activities or that can be allocated on the reasonable basis to such activities: • the salaries, wages and other employment related costs of personnel engaged in R&D activities; • the costs of materials and services consumed in R&D activities; • the depreciation of property, plant and equipment to the extent that these assets are used for R&D activities; • a reasonable allocation of overhead costs attributable to R&D activities; • other costs, such as amortisation of patents and licences, to the extent that these assets are used for R&D activities; and • costs incurred for the enterprise by other entities on R&D activities and charged to the enterprise.

3. INTANGIBLE ASSETSResearch and development Costs Marketing costs, such as those incurred to maintain or promote sales of existing product or to create a brand name, are not R&D costs. Similarly, production costs, such as those incurred to maintain or modify existing product lines, are not R&D costs. However, certain market research activities undertaken prior to the commencement of commercial production to establish the usefulness of a product or the existence of a potential market should be classified as part of R&D activities and treated in the same manner.

4. INTANGIBLE ASSETSResearch and development Costs FRS 138 further distinguishes between research and development as follows: Research is defined as the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Examples of activities typically included in research are: =>activities aimed at obtaining new knowledge; =>the search for application of research findings or other knowledge; =>the search for product or process alternatives; and =>the formulation and design of possible new or improved product or process alternatives.

5. INTANGIBLE ASSETSResearch and development Costs Development is defined as the application of research findings or other knowledge into 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. Examples of activities typically included in development are: =>the evaluation of product or process alternatives; =>the design, construction and testing of pre-production prototypes and models; =>the design of tools, jigs, moulds and dies involving new technology’ =>the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and =>the assessment of the commercial viability of a product or process prior to commencement of commercial production or use.

6. INTANGIBLE ASSETSResearch and development Costs Only development costs qualify for recognition as an asset (i.e. capitalised and deferred in the balance sheet as an intangible asset) if the criteria for capitalisation are met. All research costs should be expended in the period they are incurred.

7. INTANGIBLE ASSETSCriteria for Capitalisation as an Asset Development activities are closer to commercial exploitation of the product or process under development. If their benefits can be reliably estimated, the development costs should be deferred if they satisfy the recognition criteria of FRS 138.

8. INTANGIBLE ASSETSCriteria for Capitalisation as an Asset • FRS 138 - development costs to be recognised as an asset when = five criteria are met: • the product or process is clearly defined and the costs attributable to the product or process can be separately identified and measured reliably; • the technical feasibility of the product or process can be demonstrated; • the enterprise intends to produce and market, or use, the product or process; • the existence of a market for the product or process or, if it is to be used internally rather than sold, its usefulness to the enterprise, can be demonstrated; and • adequate resources exist, their availability can be demonstrated to complete the project and market or use the product or process.

9. Recoverability Test • Development cost recognised as an asset should not exceed the amount probable recovered from future economic benefit, after deducting further DC, production cost, and selling and administrative cost directly incurred in marketing the product. • The net recoverable amount is set the upper limit in which DC should be capitalised. • The portion of DC in excess of NRA charged as an expense immediately. • Ms 297 illustration 1

10. DC initially recognised as an Expense • DC that do not meet the asset recognition criteria = as an expense in the period it incurred. • DC initially recognised as an expense should not be recognised as an asset in a subsequent period. • Ms 298 illustration 2

11. Accounting treatment for R&D costs • The free choice of accounting methods for DC has been removed. In other words, the expense method and the deferral (capitalisation) method are not alternatives. • Therefore, any change in method should be treated as a change in accounting estimate. • Ms 298-299 illustration 3.

12. Impairment of Deferred DC • Deferred DC subject to an annual review to ascertain: • Whether the 5 criteria continue applicable • The recoverability of the unamortised amount • If no longer apply, the unamortised balance = charged as an expense immediately • Similarly, if unamortised balance exceeds NRA, = charged as an expense immediately • Ms 300 illustration 4 • DC written-down or written-off for impairment should be written back when events cease to exist, only to impairment loss recognised as an expense previously. The amount written back should be reduced by the amount of amortisation. • Furthermore, the written back recognised as a reduction in DC as an expense. • Ms 301 illustration 5

13. Amortisation of deferred DC • Amortisation should commence when the product or process is available for sale or use, when the firm starts to recognise related benefits. • So long as the product not yet commercially exploited, DC continue to be capitalised without amortisation. • Normally amortised over a period not exceeding 5 years. • Ms 302-303 illustration 6