Question 1 (a): Accounting for Intangible Assets Sweet Limited, a New Zealand ic

Question

Question 1 (a): Accounting for Intangible Assets

Sweet Limited, a New Zealand ice-cream manufactory, is trying to develop a new flavour of ice-cream. The marketing department conducted a survey in August 2012 to assess consumer preference for the best flavour(s). The survey result shows that hazel-nuts toffee flavour is the most popular one in NZ and Australia. The cost of the survey is $20,000.

The production department needs to identify some possible suppliers for the hazel-nuts and coffee beans used in producing toffee flavour ice-cream. The traveling expenses in visiting possible suppliers and checking on quality of the raw materials amount to $30,000. These expenses were incurred during November 2012 to February 2013.

In April 2013, the production department produced some hazel-nuts toffee ice-cream for testing. The cost of producing these ice-creams was $25,000. These ice-creams are used for another marketing research. The second round research costs amount to $15,000. This time the consumers were asked to evaluate the taste and to determine how much they would like to buy it for. After a few more rounds of testing in May and June 2013, consumers show a satisfaction of the taste and they are willing to pay $8 per container (1 litre container). The cost of production is $2.5 per container. The overhead per container is $.50 cent. The marketing department estimates 1 million containers of hazel-nuts toffee ice-cream can be sold annually.

Sweet Limited’s balance date is 31March.

Required:

i) Discuss the accounting treatment of Research and Development costs, stating at which point the hazel-nuts ice-cream project should be capitalised? (Explain with reference to the applicable requirements from NZIAS 38) <HAS BEEN ALREADY ANSWERED

Explanation / Answer

In accordance with the revised IAS 38, expenditure on research is recognized as an expense. There is no recognition of an intangible asset arising from research or from the research phase of an internal project. An intangible asset arising from development or from the development phase of an internal project is recognized only if an enterprise can demonstrate all of the following:

1. The technical feasibility of completing the intangible asset, so that it will be available for use or sale;

2. Its intention to complete the intangible asset and use or sell it;

3. Its ability to use or sell the intangible asset;

4. How the intangible asset will generate probable future economic benefits; among other things, the enterprise should demonstrate the existence of a market for the intangible asset or for the output of the intangible asset, or the internal usefulness of the intangible asset;

5. The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

6. Its ability to reliably measure the expenditure attributable to the intangible asset during its development.

The core conceptual difference between IFRS and U.S. GAAP with respect to accounting for R & D activities is the fact that IAS 38 assumes that in some instances the enterprise is able to identify expenditures during the development phase of the project that fulfill the requirements to be recognized as an intangible asset. Such intangible assets should not be accounted differently than those acquired externally, as long as the recognition criteria for intangible assets are met.

If an intangible asset does not meet the criteria for recognition as an asset, the expenditure is recognized as an expense when incurred. Also, an expenditure that was initially recognized as an expense should not be later included in the cost of an intangible asset.

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