At the end of the current accounting period, the following costs have been attributed to the project — Environmental Engineering plc engaged development environmentally friendly

Environmental Engineering plc is engaged in the development of an environmentally friendly personal transport vehicle. This will run on an electric motor powered by solar cells, supplemented by passenger effort in the form of pedal assistance.

At the end of the current accounting period, the following costs have been attributed to the project:

(a) A grant of £500,000 to the Polytechnic of the South Coast Faculty of Solar Engineering to encourage research.

(b) Costs of £1,200,000 expended on the development of the necessary solar cells prior to the decision to incorporate them in a vehicle.

(c) Costs of £5,000,000 expended on designing the vehicle and its motors, and the planned promotional and advertising campaign for its launch on the market in twelve months’ time.

Required:

(i) Explain, with reasons, which of the above items could be considered for treatment as deferred development expenditure, quoting any relevant International Accounting Standard.

(ii) Set out the criteria under which any items can be so treated.

(iii) Advise on the accounting treatment that will be afforded to any such items after the product has been launched.

SOLUTION

Referring to IAS 38 criteria in (ii) below, only (c) might qualify for deferral as development expenditure.

Is applied research.

Is development cost (£1.2m) that has not yet been incorporated into a specific, separate viable project. However, the line between categories is often indistinct in practice, for example, between development and production costs.