Case $8$: Ethical Considerations $-$ Integrated Case

Scenario: $$

EcoEnergy Ltd$.$ capitalized $$2$ million of research costs incurred

in developing a new renewable energy technology. The CEO

suggests that capitalizing these costs will enhance the company's

financial position, making it easier to attract new investors.

However, the CFO believes that the research costs do not meet

the criteria for capitalization under IAS $38,$ as they occurred

during the research phase rather than the development phase.

EcoEnergy is also planning a major advertising campaign

costing $$500,000$ to market its new technology. The CFO

advises that these costs should be expensed as incurred, but the

CEO insists on capitalizing them to present a stronger financial

position.

Required:

a$)$ Assess whether the capitalization of research costs aligns

with IAS $38\text{'}$s requirements. $(4$ marks$)$

b$)$ Discuss the ethical implications of capitalizing costs to

improve the company's financial appearance, including

potential consequences for stakeholders. $(4$ marks$)$

c$)$ Using the IFAC Code of Ethics, recommend how the

finance team should respond to the CEO's insistence on

capitalizing advertising and research costs. $(4$ marks$)$

d$)$ If the research costs were incorrectly capitalized, explain

how EcoEnergy should correct this in its financial

statements. What disclosure requirements apply to this

adjustment? $(3$ marks$)$