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1 b
1 b. Explain clearly what the treatment in accounts is if the development expenditure is capitalised (75 - 100 words) (2 marks) TAS 38 neau that
2
c. IAS 38 requires that development costs must be capitalised as an intangible if it satisfies certain conditions. Explain the conditions. (150-200 words) (5 marks)
3
When does an intragroup transaction require us to perform a consolidation adjustment to tax expense?
Expert Solution
1
| When an expense is of the nature, that it is bound to benefit more than one accounting period, it is not expensed immediately, in the year of incurring , but carried on the asset side of the balance sheet ----either as deferred revenue expenditure or capital work-in-progress---pending capitalisation. |
| Deferred revenue expenditures are those that are not capital in nature (like large amounts spent on adveristing), but their effects/benefits are certain accrue over a definite number of future accounting years----in which case, they are expensed, ie. charged to the income statements of all those subsequent years---the balance after proportionate expensing , is carried on teh asset-side of the balance sheet , till fully wiped out, ie becomes 0 in the balance sheet. |
| The above-mentioned development expenditures are capital in nature, which keep accumulating on the asset-side of the balance sheet---till the entire work is completed .On completion of the work & when the completed asset is put to the intended use, the entire accumulated expenditure is capitalised, ie. transferred to the respective asset account , like buildings, property or land improvements, etc.The benefits of these expenses will accrue to the business , over many accounting years & hence capitalised & carried as an asset---- & expensed in a fixed , predetermined staggering manner. |
| The journal entry at this stage will be: |
| Debit Buildings a/c(Or any capital asset) |
| Credit Capital-work-in-progress |
| From that year onwards, a portion of the total of this asset , will be expensed in the income statement of all the future, allowed (as per IRS)years , at the allowable % age times the total cost, as depreciation or capital recovery costs.The depreciation/capital recovery rates are fixed by GAAP & the IRS. |
| This is done to allocate the cost of the asset , to the years , in which revenues were earned , by utilising the asset.This in in keeping with the matching principle of accountancy , wherein, expenses incurred to earn the revenues , must be charged against the same revenues . |
| The balance of the asset's cost after charging the depreciation ,will appear on the asset-side of the balance sheet , as its carrying value. |
| The depreciation accumulates each year, in an account called accumulated depreciation--Buildings (for example) a/c---which is a contra asset a/c--ie. It reduces the value of the asset----corresponding to the yearly depreciation , that reduces income in the income statement, that in turn, goes to reduce the retained earnings , on the liability side of the balance sheet. |
| so, once the expenditures are capitalised,annual depreciation charges are debited to the income statement & the credit side of the entry ,is a contra -asset a/c called accumulated depreciation.The debit side decreases the income and the retained earnings & the credit side decreases the asset a/c |
| The journal entries are: |
| Debit Depreciation expense---Asset ------------Income statement a/c |
| Credit----Accumulated depreciation--- Asset---------Balance sheet a/c |
|
Thus , a capitalisation of an expenditure is carried out, in accounting records. 2 Answer: c. International Accounting Standards (IAS) 38 - Intangible Assets. IAS - 38 Provides Framework for Initial Measurement, Amortization , Impairment and Other related matters for Intangible Assets. Development Costs - Costs Incurred to Convert Knowledge into Plan / Design for Application. Such Development Includes Application of Research Findings, Creating Model or Prototype etc. Development Costs are to be CAPITALIZED (i.e... Costs are not Expensed Immediately but Expensed Over Period of Useful Life) as Intangible Asset if Following Conditions are met :- A. Technological Feasibility has been Established. Explanation- There are NO technical difficulties in Developing Asset & Asset will be Developed after Completion of Pre-determined Process. In other words, Development of Asset is Certain without any Issues. B. Resources available to complete the Development & Sell or Use the Asset. Explanation- Resources such as Money, Labor are available to Finish the Development of Asset for Intended Use Such as Sell or Use the Asset. Example: 10 Labors with Specific Skill Set are available to Develop Assets for Production of Product (i.e..Internal Use of Asset) or Sell Externally. C. Intention & Ability to Complete & Use or Sell of Intangible Assets. Explanation- Entity has Capacity & Willingness to Develop Asset for Intended Use Such as Use to facilitate the Production of Product by way of Reducing Labor Hours in Sorting Material or Sell Externally. D. Benefits (Economic) expected to be generated in the Future. Explanation- Entity must be able to Estimate Return from Asset Developed by Either Increase in Revenue or Decrease in Cost of Production of Product in upcoming years. E. Expenses attributable to development of the Intangible can be reliably measured. Explanation- All Expenses incurred as Development Cost for the Assets can be identified & Computed with high level of accuracy by the entity. Such Expenses could be Cost of Material used, Wages Paid to Workers in Development of Assets. So, IAS - 38 requires fulfillment of above conditions to Capitalize the Development Costs as Intangible Assets. 3 The intragroup elimination is made as a consolidation adjustment and not in the financial statements of any individual reporting entity. Consolidation adjustment is performed to eliminate unrealised gains or loss, if any present in the intergroup transaction. When the organisation files income tax combinely with its group companies(Single return for whole group) then intragroup transaction required to adjust the tax expense to eliminated unrealised profit or expense. |
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