Tag (SQ): Research and Development

33 AKYEM TRADERS LIMITED

(a) Following are the criteria that should be used while recognizing intangible assets from research and development work.

(i) No intangible asset arising from research shall be recognised.

(ii) An intangible arising from development shall be recognised if, and only if, an entity can demonstrate all of the following:

• the technical feasibility of completing the intangible asset so that it will be available for use or sale.
• its intention to complete the intangible asset and use or sell it.
• its ability to use or sell the intangible asset.
• how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
• the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
• its ability to measure reliably the expenditure attributable to the intangible asset during its development.

(b) (i) Since the product met all the criteria for the development of the product, it should be recognised as an intangible in the statement of financial position (SOFP) of the company. However, RI should capitalise only the development work (i.e. GH¢9 million) as intangible asset. IAS-38 does not allow capitalization of cost relating to the research work, training of staff and cost of trial run.

Since the product has a useful life of 7 years, the amortization expense amounting to GH¢0.32 million (GH¢9 million × 3/12 ÷ 7 years) should be recorded in the statement of profit or loss.

(ii) This purchasing of right to manufacture should be recognised as an intangible in the SOFP because:

• it is for an established product which would generate future economic benefits.
• cost of the patent can be measured reliably.

Since there is a finite life, the patent must be amortised over its useful life. The useful life will be shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years). The amortization to be recorded in SOCI is GH¢2.83 million (GH¢17 million × 10/12 ÷ 5).

(iii) The acquired brand should be recognised as an intangible in the SOFP because acquisition price is a reliable measure of its value. The amortization to be recorded in SOCI is GH¢0.12 million (GH¢2 million ÷ 10 years × 7/12).

(iv) The carrying amount of the intangible asset should be increased to GH¢10 million in the SOFP. Since there is an indefinite useful life of the intangible assets, it should not be amortised. Instead, RI should test the intangible asset for impairment by comparing its recoverable amount with its carrying amount.

Required

In the light of International Financial Reporting Standards, explain how each of the above transactions should be accounted for in the financial statements of Akyem Traders Limited for the year ended 31 December 20X4