ection A

$$The conceptual framework is a coherent system of interrelated objectives and fundamentals

that is expected to lead to consistent standards and that prescribes the nature, function, and

limits of financial accounting and reporting. It is expected to serve the public interest by

providing structure and direction to financial accounting and reporting to facilitate the provision

of even$-$handed financial and related information that is useful in assisting capital and other

markets to function efficiently in allocating scarce resources in the economy.$$

With reference to the above statement:

a$)$ Discuss the objective of financial statements. $(2)$

b$)$ Discuss the need for the development of a conceptual $($accounting$)$ framework. $(2)$

Section B

Alfa Ltd has spent R$4,5$ million during the financial year ended $31$ December $20\mathrm{.}1$ on

the development of a new motor vehicle. The first prototype has been rejected for

safety and aesthetical reasons. Further development work over a period of six months,

at a cost of about R$1$ million, will be needed before the motor vehicle can be marketed.

An additional six months and further marketing costs are needed before income will

be earned from the vehicle. The project is running $10\%$ over budget at this stage

and the additional costs $($R$1$ million$)$ have not been budgeted for. It is nevertheless

expected that all the development costs will be recovered from profits earned over a

period of five years.

Amounts at $31$ December $20\mathrm{.}1$

R

Total assets $20800000$

Liabilities $12500000$

Revenue $80600000$

Profit for the year $10400000$

Required

Referring to the definition and recognition criteria of the Framework, fully justify how you

will treat the development costs amounting to R$4,5$ million in the financial statements of

Alfa Ltd as at $31$ December $20\mathrm{.}1$