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August 25, 2019 at 5:41 am #528720Rachel
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I’m having trouble understanding part of the answer in the BPP revision kit (question #34). The question reads:
Assoria Co had $20m of capitalized dev. expenditure at cost brought forward at 1 Oct 20X7 in respect of products currently in production and a new project began on the same date.
The research stage of the new project lasted until 31 dec 20X7 and incurred $1.4M of costs. From that date the project incurred development costs of $800k/month. On 1 April 20X8 the directors of Assoria Co became confident that the project would be successful and yield a profit well in excess of costs. The project was still in development at 30 Sept 20X8. Capitalized development expenditure is amortized at 20% p.a. using a straight line method.
What amount will be charged to P&L for the year ended 30 Sept 20X8 in respect of R&D?
The answer provided lists:
1) Research Costs – 1,400,000
2) Depreciation on capitalized amount: 4,000,000
3) Expensed Development (800×3): 2,400,000
I understand 1 and 2, but why 3? Why would what are described as “development costs” hit the P&L at all and not get capitalized for 9 months since it’s stated that the project was still in development as of the reporting date? What impact does the decison of the directors have here in method of recognizing he costs? I also understand that the costs would not get amortized since the product was not ready for use. My answer would have been $5.4M
Thanks in advance.
RachelAugust 25, 2019 at 8:09 am #528727Kim SmithKeymaster
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See page 29 of the notes – development costs must be capitalised only when all the specific recognition criteria of IAS 38 have been DEMONSTRATED. All costs up to that point must be expensed.
When management decides “right – we’ve done the research – now let’s take this project to the next stage” – it doesn’t automatically meet all the recognition criteria. Management might have proved technical feasibility, for example, but in the absence of market research, the probability of future economic benefits may not have been demonstrated.
The scenario is telling you that the costs incurred during the first 3 months of the development phase did not meet all the criteria for capitalisation/asset recognition – so 3 months are expensed – and 6 months capitalised.May 24, 2022 at 3:37 pm #656350Mufadhal
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I am also struggling with this question……. I understand that we have to expense the development cost till it meets the “PIRATE” criteria then we capitalize any followed development cost which will be subjected to amortization…
However, looking at the answer sheet, it says that the answer is C $7,800,000 (without including the amortization of the 6 months capitalized cost).
The options are:
Please help us. I believe the answer should be A $8,280,000 as follows:
Research cost 1.4 million
Expenced development cost
Jan, Feb Mar (3*0.8) 2.4 million
Amortization cost (20*0.2) 4 million
Amortization cost for the
6 months( (0.8*6*0.2* 6/12) 0.48 million
Total 8.28 million
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