Victor Medical Solutions Limited has a major scientific program underway, financed through an issuance of common shares. The program has an expected budget in excess of $ 55 million, and $ 17.9 million has been spent to date.
The program targets technology to reduce the chronic inflammation associated with car-diovascular disease. To successfully market an end- product from this project, the company has to meet rigorous testing standards established by government agencies. In Phase I testing, the product must be shown to be safe in animals. In Phase II testing, the product must be shown to be safe in humans.
In rigorous Phase III testing, the product must be shown to be effective in treating the condition better than available treatments on the market, or show other advantages over available treatments (e. g., fewer side effects). As a result of the scientific program, Victor has twelve compounds in Phase I testing, three in Phase II testing, and one compound in a 2,000- individual Phase III test. All costs to date for all projects have been expensed.
1. Explain the required accounting treatment of costs in the R& D phases.
2. Why are assets not established for research and many development initiatives?
3. Do you agree with Victor Medical Solutions’ accounting policies for its scientific pro-grams? What will be the impact on its financial statements, and how would you expect investors to react to the company’s financial information?