Services Ltd incurred research and development costs of $10 million on a project to develop product A in 2018. The research phase can be clearly distinguished from the development phase of the project. Total costs in the research phase are $6 million, and in the development phase total costs are $4 million. All of the IAS 38 criteria have been met for recognition of the development costs as an asset. Product A was brought to market in Year 2019 and is expected to be marketable for five years. Total sales of Product A are estimated at more than $100 million. Required: A) Explain the research and development expenditure related regulations of IAS and US GAAP. B) Determine the impact research and development costs have on Services Ltd in 2018 and 2019 income under (1) IFRS and (2) U.S. GAAP. C) Summarize the difference in income, total assets, and total shareholders’ equity related to Product A over its five-year life under the two different sets of accounting rules.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Answer for Question A, B and C.
Services Ltd incurred research and development costs of $10 million on a project to develop product A in 2018. The research phase can be clearly distinguished from the development phase of the project. Total costs in the research phase are $6 million, and in the development phase total costs are $4 million. All of the IAS 38 criteria have been met for recognition of the development costs as an asset. Product A was brought to market in Year 2019 and is expected to be marketable for five years. Total sales of Product A are estimated at more than $100 million.
Required:
A) Explain the research and development expenditure related regulations of IAS and US GAAP.
B) Determine the impact research and development costs have on Services Ltd in 2018 and 2019 income under (1) IFRS and (2) U.S. GAAP.
C) Summarize the difference in income, total assets, and total shareholders’ equity related to Product A over its five-year life under the two different sets of accounting rules.
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