As a professional accountant, you work for Optimistic Ltd. Optimistic Ltd was incorporated with the objective of developing designer drugs to meet the needs of an ageing population. In reviewing the company’s draft financial statements for the year ended 30 June 2017, you detected the following:

Your manager has capitalised $1,000,000 of research expenditure as research and development. This expenditure is clearly “research” as per the definition in AASB138

As per AASB 138:

No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred.  In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred. Therefore this type of expenditure is to be expensed immediately as per the requirements of AASB 138 Intangible Assets.

• If this research expenditure had been recorded as per the requirements of AASB 138, the company would have made a loss of $500,000.

• You are also aware that your manager stands to receive a generous bonus for meeting prescribed profit targets.

QUESTION:

In your capacity as a professional accountant, how would you personally handle this situation – what would be your first step, second step, etc? 

In your response, consider the Code of Ethics for Professional Accountants and how you intend to resolve the situation. 

Answer rating: 100% (QA)

I would first speak to my manager about my concerns regarding capitaliz... View the full answer