Question

Research and development 

Eradication Laboratories Ltd is undertaking a number of research and development projects, one of which is described below.

During 2009: Eradication established a new research project concerned with identifying radically different poisons, useful for controlling pests. At the time the research project was established, it was not focused on developing any particular chemical form of poison, nor was in concerned with controlling any particular type of pest. During 2009 experiments were conducted, using a variety of chemical compositions, on a variety of pests. Costs incurred in 2009 were $1 million.

During 2010: The experiments conducted established that a particular chemical composition was lethal to mice. In some rural areas of Australia, mice plagues are a severe problem. Eradication's management believe that a large potential market existed for an effective mouse poison that was chemically different from those currently available. Eradication's management decided that a project team should concentrate its efforts on the new mouse poison. While experiments established that the poison was lethal to mice, a large quantity of it (in its present form) was required to kill significant mouse populations. Thus, the poison was not a commercially viable product in its present form. Eradication undertook additional research to find a more concentrated form of the new poison. Costs incurred in 2010 were $3.5 million.

During 2011: Additional research resulted in a more concentrated form of the new poison and experiments confirmed that it was lethal to mice. However, as the new poison had a radically different chemical composition, it was necessary for the research team to undertake additional work to determine how to produce the new poison economically. Production might require modifications to the chemical composition of the new poison. Market research confirmed that there was a large market for a chemically different mouse poison. Costs incurred in 2011 were $6 million.

During 2012: The research devised a means of mass producing the new poison economically. The costs incurred in 2012 on this task were $2 million. Eradication constructed production facilities for the new poison at a cost of $10 million. Production began in 2012. The amount expected to be recouped from future operations is $500 million.

Required:

a)    Distinguish between research and development, and classify the various phases of the mouse poison project into research or development.

b)    Determine the total amount of research and development costs that should be recognised as an internally developed intangible asset, in accordance with AASB 138, at the end of each year (2009, 2010, 2011 and 2012). Justify your answer.

(Source: Henderson, S., Peirson, G., & Herbohn, K. (2011). Issues in financial accounting (14th ed.) (pp. 348-349). Sydney: Pearson Education Australia.)