Question: The Thomas Company is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this product. As of the end of the year December 31, 2010, the product has not been manufactured for resale; however, the prototype unit was built and is in operation. Throughout 2010, the division incurred certain costs including design and engineering studies, prototype manufacturing costs, administration expenses (including salaries of administrative personnel), and market research costs. In addition, $500,000 in equipment (estimated useful life of 10 years) was purchased for use in developing and manufacturing the preproduction prototype and will be used to manufacture the product. Approximately $200,000 of this equipment was built specifically for the design and development of the product; the remaining $300,000 of equipment will be used to manufacture a product once it is in commercial production.

1. In the U.S. (SFAS No. 2), development costs are expensed but under the IFRS (IAS 38), many development costs are capitalized. Judge and support which treatment adheres best to the matching principle, basic to the conceptual frameworks of both U.S. GAAP and IFRS.