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.
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Dear Mike,
The last bullet point on page 135 (chapter 26 of course notes 12/12) says ” expenditure previously expensed should not be reversed and capitalized”.
But isn’t part (b) of question Emerald (12/07) asking to reverse the previously written off development expenditure?
Thank you!
I don’t have access to December 2007 International stream exam – it’s not on this site and it’s not on the ACCA site.
Do you want to post the precise wording of part b from the question Emerald?
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- Topics: 16
- Replies: 24
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Product development costs are a material cost for many companies. They are either written off as an expense orcapitalised as an asset.
Required:
(a)Discuss the conceptual issues involved and the definition of an asset that may be applied in determiningwhether development expenditure should be treated as an expense or an asset.(4 marks)
(b)Emerald has had a policy of writing off development expenditure to the income statement as it was incurred. Inpreparing its financial statements for the year ended 30 September 2007 it has become aware that, under IFRSrules, qualifying development expenditure should be treated as an intangible asset. Below is the qualifyingdevelopment expenditure for Emerald: $’000Year ended 30 September 2004300Year ended 30 September 2005240Year ended 30 September 2006800Year ended 30 September 2007400All capitalised development expenditure is deemed to have a four year life. Assume amortisation commences atthe beginning of the accounting period followingcapitalisation. Emerald had no development expenditure beforethat for the year ended 30 September 2004.
Required:Treating the above as the correction of an error in applying an accounting policy, calculate the amounts whichshould appear in the income statement and balance sheet (including comparative figures), and statement ofchanges in equity of Emerald in respect of the development expenditure for the year ended 30 September2007.
Note: ignore taxation.
Look at the criteria which must all be satisfied if development expenditure is to be capitalised. If the expenditure DOES meet the criteria, the expenditure MUST be capitalised and, if not, it must NOT be capitalised.
300 should have been capitalised in 2004
and amortised by 75 in 2005
240 should have been capitalised in 2005
in 2006, 75 should be amortised ( from 2004 ) and 60 amortised from 2005
Also in 2006, 800 should be capitalised
In 2007, capitalise 400, and amortise 75 from 2004, 60 from 2005, 200 from 2006
Ok?
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So this – “expenditure previously expensed should not be reversed and capitalized” -is conditioned.
Yes, because the question specifically states that you are to treat it as the correction of a fundamental error…..”Treating the above as the correction of an error in applying an accounting policy, …..”
If it had merely been a case of the directors realising that they COULD have capitalised instead of expensing, in that situation they are not allowed to rethink, with the benefit of hindsight and now say “All that expense from earlier years? We could have capitalised it! Let’s credit this year’s Statement of Income and capitalise it now”
Not allowed
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