CFA Level I, Finan­cial Repor­ting and Ana­ly­sis, Rese­arch & Deve­lo­p­ment Costs

Axis Limi­ted is a Dut­ch engi­nee­ring firm that is cur­r­ent­ly under­ta­king two projects.

Pro­ject 1

A pro­ject con­cer­ning sus­tainab­le pipe­lines and drai­na­ge sys­tem to redi­rect water flow from a district in Ams­ter­dam. The com­pa­ny has recei­ved appro­val from the city and the pro­ject imple­ments new tech­no­lo­gy which is pos­si­ble to use.

Cost: 540€ million

Pro­ject 2

Rese­arch to be con­duc­ted that con­cerns the con­nec­ting of two districts wit­hin the city of Rot­ter­dam by a new bridge. The rese­arch pro­po­sal has recei­ved posi­ti­ve reviews.

Cost: 180€ million

Under IFRS sti­pu­la­ti­ons, the amount capi­ta­li­zed from the two pro­jects is clo­sest to:

A. 720€ million

B. 180€ million

C. 540€ mil­li­on

Solu­ti­on: C.

IFRS man­da­tes that com­pa­nies sepa­r­ate­ly iden­ti­fy rese­arch and deve­lo­p­ment pha­ses of pro­jects, for intern­al­ly-crea­ted intan­gi­ble assets. Addi­tio­nal­ly, the inter­nal cos­ts incur­red to gene­ra­te the intan­gi­ble asset during the rese­arch pha­se should be expen­sed, but tho­se that incur­red during the deve­lo­p­ment pha­se can be capi­ta­li­zed as intan­gi­ble assets, if the pro­ject is tech­no­lo­gi­cal­ly pos­si­ble, the com­pa­ny has shown that it is able to use or sell the resul­ting asset, and shown its abi­li­ty to com­ple­te the pro­ject. Axis Limi­ted can capi­ta­li­ze 540€ mil­li­on of the first pro­ject becau­se it meets the requi­re­ments of development.

 

 

 

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