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Hello Chris,
I have a doubt regarding the capitalising of development costs, as I know that these costs are only capitalised when the commercial production starts or otherwise if not stated so, they are treated as expense.
But in this question from Kaplan:
Cowper plc has spent $20,000 researching new cleaning chemicals
in the year ended 31 December 20X0. They have also spent
$40,000 developing a new cleaning product which will not go into
commercial production until next year. The development project
meets the criteria laid down in IAS 38 Intangible Assets.How should these costs be treated in the financial statements
of Cowper plc for the year ended 31 December 20X0?A $60,000 should be capitalised as an intangible asset on the
statement of financial position.B $40,000 should be capitalised as an intangible asset and
should be amortised; $20,000 should be written off to the
statement of profit or loss.C $40,000 should be capitalised as an intangible asset and
should not be amortised; $20,000 should be written off to the
statement of profit or loss.D $60,000 should be written off to the statement of profit or loss
The Answer is C – $20,000 is research and should be written off as incurred.
$40,000 should be capitalised as a development asset, but is not
amortised until commercial production begins.So can you please tell why those 40k are not treated as expense?
Hi,
The costs are capitalised if we know that we will generate economic benefits, and given that production starts next year, this is evidence that we will get those benefits, so capitalise the costs now. We don’t have to wait until the physical production starts to capitalise the costs, when production starts is when we begin to amortise.
Thanks
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