You have been hired as the assistant in the finance department of a medium- sized publicly traded firm. Realizing the importance of accounting to your new duties, you have recently completed an intensive introductory course in financial accounting. On this course, you learned that research costs are expensed during the period they are incurred but that development costs should be treated as an asset and amortized over their projected benefit period.
Over the prior two years, your company’s R& D unit had achieved an important break-through in electronic copying. This year, the company spent a substantial amount of money to develop a revolutionary new type of copying equipment and bring it to a marketable stage. Your superior, Matta Hari, wishes to treat the development costs as an expense in the current year rather than deferring and amortizing them. After all (she argues), the costs have already been incurred and the cash spent, and she would prefer that future earnings from the sale of the equipment not be burdened by amortization of the development cost. She also points out that the company’s primary lender, one of the “ Big 5” Canadian banks, is particularly interested in assessing the company’s cash flow. Ms. Hari has asked you to research the issue and submit a written report to her on this issue by tomorrow morning.
You have researched your firm’s past practice in this area and reread the relevant accounting standard. Although your firm has not previously experienced the level of research and development expenses associated with the present project, past practice in your firm has been to expense these costs. Your reading of the accounting standard confirms what you recall from your course— that development expenditures should be capitalized and amortized if certain criteria have been met.

Explain the status of GAAP to this manager. Be sure to distinguish between general purpose and special purpose financial statements.

  • CreatedFebruary 17, 2015
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