Case $2$: IAS $38-$ Intangible Assets

Scenario:

NeuroSoft Ltd$.$ has developed a new software product that integrates AI into customer relationship management systems. The development took three years and incurred $$3$ million in total costs. The first two years involved research, costing $$1\mathrm{.}2$ million, and the final year focused on development, costing $$1\mathrm{.}8$ million. NeuroSoft plans to update the software annually at a cost of $$200,000$ per year.

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Required:

a$)$ Explain the criteria under IAS $38$ that must be met for the software development costs to be recognized as an intangible asset.

b$)$ Discuss how the company should differentiate between the research and development phases and the accounting treatment for costs in each phase.

c$)$ How should the annual update costs be treated in the financial statements?