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Please help me with this question.
Note (iv): Development co(dev cost) => Why do we have these two below adjustments?
Write off dev cost incurred to RE (50m-18m) = (32m)
Write back the amortisation of dev cost to RE = 10mThanks,
Hi,
Apologies for the later than usual response.
The key is that the parent has deemed the subsidiary to have not met the IAS 38 criteria for development. As the subsidiary has capitalised and amortised the expenditure, then we need to reverse the entries made by the subsidiary.
The cost of $50 million was capitalised, so this now needs to be expensed, hence the reduction to retained earnings but the $18 million relates to the total of $50 million , which had been capitalised at the acquistion date. The difference of $32 million is the adjustment for the post acquistion period. . The amortisation of $10 million was charged through profit or loss, hence this needs to be removed from profit or loss and is therefore added back to retained earnings.
It is the trickiest adjustment to the entire question so don’t get too hung up on it, and focus on getting the remainder of the questions correct.
Thanks
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