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Question: CD is a manufacturing entity that runs a number of

operations including a bottling plant that bot...

CD is a manufacturing entity that runs a number of operations including a bottling plant that bottles
carbonated soft drinks. CD has been developing a new bottling process that will allow the bottles to be
lled and sealed more efficiently. The new process took a year to develop. At the start of development,
CD estimated that the new process would increase output by 15% with no additional cost (other than the
extra bottles and their contents). Development work commenced on 1 May 20X0 and was completed on
20 April 20X1. Testing at the end of the development con rmed CD’s original estimates. CD incurred
expenditure of $180,000 on the above development. CD plans to install the new process in its bottling
plant and start operating the new process from 1 May 20X1. The end of CD’s reporting period is 30 April.
Required: Explain the requirements of IAS 38 Intangible Assets for the treatment of development costs

Expert Answer

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(i) Explain the requirements of IAS 38, Intangible Assets for the treatment of development costs.

(ii) Explain how CD should treat its development costs in its nancial statements for the year ended 30
April 2006.

Answer:

(i) Refer to the text.

(ii) All of the necessary criteria seem to have been met by CDs new process:

♦ It is technically feasible, it has been tested and is about to be implemented;

♦ It has been completed and CD intends to use it;
♦
♦ The new process is estimated to increase output by 15% with no additional costs other than direct
material costs;

♦ The expenditure can apparently be measured.

CD will treat the €180,000 development cost as an intangible non-current asset in its balance sheet at 30
April 2006. Amortisation will start from 1 May 2006 when the new process starts operation.

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