Amortisation is not recorded on product development in progress and development is complete Research and Development (from Footnote II) Year ended 31 March 2017 ( millions) Total research and development costs incurred 1.794 Research and development expensed (368) Development costs capitalized 1.426 Intangible Assets (selections from Footnote 18) Page 154 Cost Product Development in Progress (millions) Capitalized Product Development ( millions) Balance at 31 March 2016 1.539 4.525 Additions-internally developed 1.426 Transfers (809) 809 Disposals (138) Balance at 31 March 2017 2.156 5.196 Amortization Balance at 31 March 2016 1.635 Amortization for the year 769 Disposals (138) Balance at 31 March 2017 2.266 Net book value at 31 March 2017 2,156 2.930 Required: #1 BLU Required: 1. What percentage of R&D expenditures was capitalized during the fiscal year ending March 31, 2017? How does this percentage compare with the capitalization ratios of the German automakers profiled in Exhibit 4.4? 2. Estimate the average useful life of product development costs by dividing average capitalized product development costs by the amortization expense for fiscal 2016-2017. Compute average capitalized product development costs as simple average balances at the beginning and end of each fiscal year. Does your estimate fall within the range of the useful lives for development costs disclosed in the accounting policy footnote? 3. The table below contains metrics as reported in JLR's three primary financial statements. Convert these metrics to a U.S. GAAP basis. Where necessary assume that JLR's tax rate is 21.1 percent, a rate disclosed in Footnote 14. Taxation. As Reported (IFRS) (millions) U.S. GAAP Profit before tax 1.610 Net profit (after tax) 1.272 Total assets 10.962 6.581 Shareholders equity Operating cash flow 3.160 Capital expenditures 3,056 Expenditures for both PPE and intangibles 9 a CASE 4-1 Jaguar Land Rover PLC Jaguar Land Rover Automotive PLC (LR) is a maker of luxury autos based in Coventry United Kingdom. JLR uses IFRS and has a fiscal year-end of March 31. You have been asked to use your knowledge of IFRS to convert key metrics for the company to a U.S. GAAP basis. For simplicity, you may assume that the only material differences between JLR's as reported numbers and those it would report under U.S. GAAP are traceable to its policy of capitalizing development costs. Internally Generated Intangible Assets (from Footnote 2, Accounting Policies) Research costs are charged to the consolidated income statement in the year in which they are incurred. Product development costs incurred on new vehicle platforms, enghues, transmission and new products are recognised as intangible assets when feasibility has been established, the Group has committed technical, financial and other resources to complete the development and it is probable that the asset will generate future economic benefits The costs capitalised include the cost of materials, direct labour and directly attributable overhead expenditure incurred up to the date the asset ta available for use Interest cost incurred is capitalised up to the date the asset is ready for its intended use, based on borrowings incurred specifically for financing the asset or the weighted average rate of all other borrowings, if no specific borrowings have been incurred for the asset. Product development cost is amortised over a period of between two and few years Capitalised development expenditure is measured at cost less accumulared amortisation and accumulated impairment loss, if aw Amortisation is not recorded on product development in progress will development is complete Research and Development (from Footnote 11) Year ended 31 March 2017 ( millions) 1.794 Total research and development costs incurred EXHIBIT 4.4 The Financial Statement Effects of Capitalized Development Costs in the German Auto Industry Monetary Amounts Stated in Millions BMW Daimler Volkswagen R&D expenditure 5,164 7,572 13,672 Less: Capitalized development costs (2,092) (2,315) (5.750) 40.5% 30.6% 42.1% Capitalization ratio in % Plus: Amortization of capitalized development costs R&D expenses as reported under IFRS 1.222 1.280 3,587 4.294 6.537 11,509 Income statement effects in 2016: Operating profit as reported under IFRS Less: Profit attributable to capitalization 9.386 12,113 7.103 (870) (1.035) (2.163) Operating profit under 100% expensing 8,516 11.078 4.940 Increase (%) in operating profit under IFRS 10.2% 9.3% 43.8% Balance sheet effects on Dec 31, 2016 7.221 8,827 19,572 Capitalized development costs, net Percentage of identifiable intangible assets 92.7% 80.9% 50.1% Equity as reported under IFRS 47,363 59.133 92.910 Less: Equity attributable to capitalization (5.067) (6.194) (13.735) Equity under 100% expensing 42.296 52.939 79.175 Increase (%) in equity over 100% expensing 12.0% 11.7% 17.3%