R&D and Leases

R&D and Leases

Question 1(a)

(i)

NZIAS 38 will be used in determining the accounting treatment of research and development. An entity is required to disclose the amount of R&D expense in financial statements during the in which it incurred. An account has to be maintained for all those activities that are attributable to research and development. NZIAS 18 became effective from 1 January 2007 and required compliance from all public listed entities (Deegan and Samkin, 2009). The requirements of NZIAS 38 strongly focus on internally generated intangible assets.

The main focus is on recognition and subsequent re-measurement. Generation of future economic benefits needs to be proven to identify an intangible asset that is generated internally. The cost of the asset too needs to be determined reliably. In some instances cost of generation cannot be distinguished from cost of maintaining internally generated intangible assets. The generation of asset is classified into two broad categories, to determine whether the criterion for recognition has been met by the intangible asset that is generated internally. The broad categories include Research phase and Development phase. If distinction can't be made between research phase and development phase the entity is required to treat entire expenditure as research expense. An entity is encourage to disclose those intangible assets which have been fully amortised and but are still in use and those assets that are still used by the entity but do not meet the recognition criteria defined by NZIAS 38.

Research phase

At the research stage, no intangible asset shall be recognized if the intangible asset has arisen from an internal project. When the research expense is actually incurred, it should be recognised then and there only. It is recognised as an expense and not capitalised because the entity cannot demonstrate at this point in time that the research will result in probable future economic benefits. Research comprises of following activities; obtaining new knowledge, market research and surveys, search for alternative to materials, processes etc. Final selection, evaluation, design or formulation for possible alternatives to improved products, processes etc. The reason for expensing out research cost is vey logical. Since at the research stage, viability of the project cannot be determined and it is impossible to estimate whether future economic benefits will flow to the enterprise. Capitalising research costs used to be one of the most common way of deliberately manipulating and widow dressing financial statements. NZIAS 38 seeks to address this anomaly and fill this loophole so that investors are no longer misguided (Deegan and Samkin, 2009).

Development phase

An intangible asset arising from development phase shall be recognised if the following conditions can be satisfied. The technical viability of completing the intangible asset so that it will be available for use or sale; intention to bring into use or sale the asset once it is hundred percent complete; ability to sell or use the intangible asset; entity can demonstrate that the market for product exists and it can generate future probable economic benefits (Deegan and Samkin, ...