Development costs

Hello tutor,

I’ve done this particular question (June 2015, Klancet part C) on the Kaplan revision kit a few times now, but only decided to refer to the actual exam answer for it this time.

I noticed the answers in Kaplan kit are a little different.

Extract:
“The contract terms require Klancet to pay an upfront payment on signing of the contract, a payment on securing final regulatory approval, and a unit payment of $10 per unit, which equals the estimated cost plus a profit margin, once commercial production begins. The cost-plus profit margin is consistent with Klancet’s other recently negotiated supply arrangements for similar drugs.”

The actual ACCA answer says that
“There is no indication that the agreed prices for the various elements are not at fair value. In particular, the terms for product supply at cost plus profit are consistent with Klancet’s other supply arrangements. Klancet should capitalise the upfront purchase of the drug and subsequent payments as incurred, and consider impairment at each financial reporting date.”

Kaplan has completely omitted the ‘fair value’ and ‘subsequent payments’ treatments out.

Why are subsequent payments capitalised even when commercial production has commenced?

Why are fair values mentioned here as well? To suggest that the payment reflects probability that future economic benefits will flow from this drug?

Feel like I’ve been learning the wrong standard from Kaplan all this while. Am really hoping to hear from you, thanks again.