Tutorial 5 FA IV

Question 1
IAS38 Intangible assets prescribe the accounting treatment for research and development expenditure.
In the context of IAS38, you are required to:
(a) Explain what you understand by the term 'research' and 'development'.

Research is original and planned investigation undertaken with the prospect of gaining
new scientific or technical knowledge and understanding.

Development is the application of research findings or other knowledge to a plan or

design for the production of new or substantially improved materials, devices, products,
processes, systems or services before the start of commercial production or use.

(b) What is the accounting treatment of research and development cost? State the reasons.

Recognition of the cost as an asset will only occur where it is probable that the cost will
produce future economic benefits for the enterprise and where the costs can be
measured reliably.

In the case of research costs, this will not be the case due to uncertainty about the
resulting benefit from them, so they should be expensed in the period in which they are
incurred.

Development activities tend to be much further advanced than the research stage and so
it may be possible to determine the likelihood of future economic benefits.

Where it is possible to do so, the development costs should be carried forward as an

asset.

Most of the time, development costs will be recognised as expense in the period in which
they are incurred unless the criteria for recognition are met.

(c) Under what circumstances can development costs be recognised as an asset?

The criteria for recognition of development costs as an asset are:

 The product or process is clearly defined and the cost attributable to the product
or process can be separately identified and measured reliably;
Question 2
An intangible asset is measured by a company at fair value. The asset was revalued by RM480,000 in
the year 2019, and there is a revaluation surplus of RM480,000 in the statement of financial position.
At the end of the year 2020, the asset is valued again, and a downward valuation of RM600,000 is
required.
Required
(a) Prepare journal entries to show the revaluation for the year 2019 and 2020.

Journal entries
DR CR
RM RM
2019 Asset + 480000
Revaluation reserve + 480000

2020
Revaluation reserve (-) 480000
SPL (balancing figure) 120000
Asset (-) 600000

(b) State the accounting treatment for the downward revaluation in year 2020.

The decrease in value of RM600,000 should be charged to statement of profit or loss,

BUT the decrease is reversing a previous increase which was recognised as a revaluation
reserve of RM480,000.

To the extent that this offset is made, the decrease is set-off against revaluation reserve
of RM480,000. The revaluation surplus will reduced to RM0 and any excess is then
charged to the statement of profit or loss amounted to RM120,000 in 2020.
Question 3
Lion is a company producing medicinal drugs. At 1 October 2019 the following balances existed in
the records:
Deferred development expenditure RM1,200,000
Project Q RM800,000. This is the balance remaining of
expenditure totaling RM1,000,000 on a completed
project which is being amortised on the straight
line basis over 10 years.

Project R RM400,000. This is the accumulated costs to 30

September 2019 of developing a new drug. The
project was completed in July 2020 and sales of
the drug are expected to begin in January 2021.

Equipment used in research RM300,000 (cost RM500,000, depreciation to date RM200,000)

During the year ended 30 September 2020 the following costs were incurred:
Project R Costs to complete RM250,000
Project S (a research project) RM140,000
Purchase of testing equipment for use in the research department RM180,000.
All equipment has an estimated useful life of five years, and a full year’s depreciation is charged in
the year of acquisition.

Required:
(a) Calculate the figures to be included in Lion’s statement of profit or loss for the year ended 30
September 2020 and statement of financial position as at that date, and state the headings
under which they will appear.

Research and development

Balance at New STM of P or L STM of FP
1 Oct 2019 expenditure Amortisation Research 30 Sep 2020
RM RM RM RM RM
Project Q 1,000,000
-200,000 -100,000 700,000
Project R 400,000 250,000 650,000
Project S 140,000 -140,000 -
1,200,000 390,000 -100,000 -140,000 1,350,000

Equipment Balance at New STM of FP

1 Oct 2019 expenditure Depreciation 30 Sep 2020
RM RM RM RM
500,000 180,000 680,000
-200,000 -136,000 -336,000
300,000 180,000 -136,000 344,000

Depreciation of equipment= 500,000/5= 100,000

= 180,000/5= 36,000
= 100,000+ 36,000
= 136,000
Headings
 The amortisation of development expenditure of RM100,000 and the research
expenditure of RM140,000 and the depreciation of research equipment amounted to
RM136,000 will appear in the statement of profit or loss under cost of sales.

The development expenditure of RM1,350,000 will appear in the statement of financial

position under intangible assets.

(b) Prepare the disclosure notes on ‘Research and Development Costs’. (The note detailing the
accounting policy for research and development costs, the amortisation method and useful
lives or amortisation rates used are NOT required.)

Disclosure notes

Statement of profit or loss

The aggregate amount of research and development costs and depreciation recognised
as an expense during the period was RM376,000, all charged in cost of sales.

Statement of financial position

Movements on development expenditure during the year were:

Cost Amortisation Net book value

RM RM RM
Balance at 1 Oct 2019 1,400,000 -200,000 1,200,000
Year ended 30 Sep 2020
Amortisation -100,000 -100,000
New expenditure 250,000 250,000
1,650,000 -300,000 1,350,000

Question 4
IAS 38 Intangible Assets prescribes the accounting treatment for intangible assets.
Gaya Sdn. Bhd. is developing a new production process. The development expenditure incurred for
the year ended 31 December 2020 was RM800,000, of which RM480,000 was incurred during the
first six month.
The company was able to demonstrate that the development expenditure met the criteria for
recognition as an intangible asset only as at 1 July 2020. The recoverable amount of the know-how
embodied in the process is estimated to be RM280,000.

Required:
Discuss the recognition of the RM800,000 development expenditure for the financial year ended 31
December 2020. (7 marks)

The RM480,000 expenditure incurred during first six months has been written off as expense
because the recognition criteria were not met, and this expenditure cannot be reversed to form
part of the cost of production process recognised in the balance sheet.

The balance of RM320,000 to be recognised as an intangible asset, but due to the recoverable
amount was only RM280,000, the amount to be capitalised should not be more than its
recoverable amount. RM40,000 to be recognised as an expense.

In this case, the production process is recognised as an intangible asset in the SFP as at 31
December 2020 at a cost of RM280,000.
Question 5
(a) Aidscure Bhd. is a pharmaceutical manufacturer involved in developing and producing medical
drugs.

Required:
Explain the accounting treatment if necessary for each of the following events that occurred during its
financial year:
(i) An amount of RM100,000 was spent in identifying whether customers prefer tablets or
capsules.

It is purely market research. The amount of RM100,000 should be written off as an

expense immediately in the statement of profit or loss.

(ii) In previous years, the company had spent RM2 million in developing a cure for influenza.
This had previously been capitalised in accordance with the criteria laid down in IAS 38
Intangible Assets. However, circumstances have changed and the product is viewed as no
longer viable. An amount of RM100,000 had already been spent in the current year.

The previous RM2 million and the current RM100,000 must both be written off as
an expense as the product is no longer viable.

(iii) The company has spent RM500,000 in previous years which had been capitalised and
RM20,000 in the current year on a medical drug to prevent nausea in pregnancy. The
medical drug was successfully launched in the current year and is expected to achieve
profits for five years from its launch.

The expenditure of RM520,000 meets the criteria laid down in FRS138 therefore can
be capitalised and amortised over the life of the product. Amortisation commences
in the current year. Amortisation per year is RM520,000/5years = RM104,000.

(iv) An amount of RM250,000 was spent in trying to find a cure for AIDS. No marketable
product has yet been identified.

This is merely a research and must be written off as an expense immediately to the
statement of profit or loss.

(b) You are given the following information about the research and development expenditure on a
particular project called Tumorkil undertaken by Aidscure Bhd.:

The development costs incurred in the years 2019 and 2020 had met the recognition criteria as an
intangible asset. The commercial production of Tumorkil drug is expected to commence in the year
2021.
Required:
Prepare separate research and development accounts for the years 2017 to 2020 based on the
information given.
Question 6
Bird flu has been rampant in Vietnam and China. It has sparkled serious concern of scientists around
the globe. It is believed that if no drastic measure is taken to control the flu, there may be another
human disaster.
Kajian Sdn. Bhd. (Kajian) is a holding company which has 2 subsidiaries, Jaya Cegah Sdn. Bhd. (Jaya
Cegah) and Jaya Uji Sdn. Bhd. (Jaya Uji). The principal activities of the two subsidiaries are:

 Jaya Cegah provides service on mass slaughtering of chicken. The subsidiary managed to get many
contracts from the government in slaughtering animals during the nippah and now the bird flu
pandemic.

 Jaya Uji engages mainly in laboratory work.

The newly appointed director of Kajian, Encik Tumit, consulted you on the following:

(a) Jaya Cegah incurred expenses relating to slaughtering of chicken amounting to RM500,000. Encik
Tumit is told that he could capitalise the whole amount of RM500,000 in financial statement.

Required:
Advise Encik Tumit whether the amount should be capitalised according to IAS 38 Intangible asset.

Encik Tumit cannot capitalise RM500,000 because the amount is neither research or
development expenditure.

Action required by Encik Tumit : the whole amount of RM500,000 should be charged to income
statement as an expense.
(b) Jaya Uji spent RM600,000 in pure laboratory research on bird flu. It is believed that this
investment is needed to analyse why the bird flu virus can cause human infection.

Jaya Uji also spent RM300,000 on testing the existing bird flu vaccine on human beings after the
existing vaccine is scientifically enhanced.
The testing was carried out in Vietnam. The result of the testing is encouraging. However, there is still
a long way before massive commercial production is possible.

Required:
In the context of IAS 38 Intangible assets, explain the following matters to Encik Tumit.
(i) Accounting treatment for RM600,000 and RM300,000 respectively.

The accounting treatment for RM600,000

RM600,000 must be written off immediately to income statement upon incurrence.
Reason: It is research expenditure and too much uncertainty is involved.

The accounting treatment for RM300,000

RM300,000 must also be written off to income statement upon incurrence.
Reason: No doubt the result of testing is encouraging. However, there is still a long
way to go before the success of the scientific work can be assessed with reasonable
uncertainty.
Due to prudence concept, it has to be written off.

(ii) In what respect is the accruals or matching concept being applied in IAS 38 Intangible
assets.

The application of accruals / matching concept:

It can be seen in the capitalisation of development expenditure when it can fulfil the
criteria of recognition.

All the criteria must be satisfied. The rationale behind the capitalisation is to ensure
that there is future sales revenue from the product / process developed to match the
relevant expenditure capitalised when the expenditure is amortised later.