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Hi Sir,
For part B in this qns : I state that the software in the computer games is an intangible assets(IA). According to FRS 38 software is an IA right? The risk of not capitalising this in the SFP will result in understating the asset and profit.
I saw the examiner answer did not mention so i was wondering am I correct on stating this.
I’m not sure I understand your point!
You say “the examiner answer did not mention” in relation to the capitalisation of the development costs of the computer software.
Here’s an extract from the examiner’s answer.
“Intangible assets – development costs
There has been a significant increase in the amount of development costs capitalised as an intangible asset. There is a risk that this amount is overstated. Development costs should only be recognised as an asset when the criteria for capitalisation from IAS 38 Intangible Assets have been met. For example, the ability of the development costs to generate economic benefit should be demonstrated, along with the existence of resources to complete the development.
As discussed earlier, there is an incentive for management to maximise profits, so it would be in management’s interests to capitalise as much of the development costs as possible. The intangible asset currently recognised represents 43·3% of total assets, and is highly material to the financial statements.”I look forward with interest to your observations!
Ok I got it. Not all development costs can be capitalised till it passes all criteria in FRS 38.
Another ans(not from this exam qns) on FRS 38 for research costs it must be always expensed off in profit n loss as it failed the criteria not able to generate economic benefit ?? Thanks Sir in advance
I got my ans from this article
Thanks.
Amelia, since you are quoting FRS to me, I assume that you are based in UK
The F7 exam has NO UK variant so you have to follow the IFRS / IAS international standards.
They say (very briefly):
all research expenditure is written off as incurred
all expenditure other than research is potentially development expenditure and that MUST be capitalised if it satisfies the laid-down criteria.
If it fails to satisfy any one of those criteria, it MUST NOT be capitalised and must instead by expensed through profit or loss
All clear?
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