Development phase: recognition criteria

Learning objectives

• Assess whether the six criteria of the development phase are demonstrated at a given date.L2, L3, L4
• Calculate the amount of development expenditure to be capitalised from the date on which the criteria are met.L2, L3
• Recognise the split between expense and asset of a development project.L2, L3
• Assess the demonstration of the technical feasibility of a development project.L3
• Assess the availability of adequate technical, financial and other resources to complete the development.L3

Normative references

• IAS 38 §57An intangible asset arising from development is recognised if, and only if, the entity can demonstrate all of the following: (a) the technical feasibility of completing it so that it will be available for use or sale; (b) its intention to complete it and use or sell it; (c) its ability to use or sell it; (d) how it will generate probable future economic benefits, including the existence of a market for its output or for the asset itself or, if it is to be used internally, its usefulness; (e) the availability of adequate technical, financial and other resources to complete the development and to use or sell it; (f) its ability to measure reliably the expenditure attributable to it during its development.
• IAS 38 §60To show how an internally generated intangible asset will generate probable future economic benefits (criterion 57(d)), the entity assesses the benefits to be received from the asset by applying the principles of IAS 36; if the asset generates benefits only in combination with other assets, it applies the IAS 36 concept of a cash-generating unit.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

19 questions

• To recognise an intangible asset arising from the development phase, which of the following must the entity demonstrate?L3
• A manufacturer is developing a new sensor. On 1 May, it demonstrates for the first time all the capitalisation criteria for the development phase: a successful prototype, financing obtained, intention and ability to market the sensor, documented market outlets and reliable cost tracking. Development expenditure for the year, paid in cash, amounts to {costs_before_criteria} before that date and {costs_after_criteria} after it. Record the summary entry for the year.L3
• A small company is designing a medical monitoring application. In February, a prototype demonstrates technical feasibility. In May, the board approves the completion and marketing of the project, a market study documents the outlets and time tracking allows costs to be attributed to the project reliably. However, the financing needed to complete the development is obtained only in September, when a bank loan is signed; no agreement or indication of financing existed before September. Marketing begins in January of the following year. From when is the development expenditure capitalised?L4
• An automotive supplier is developing a next-generation battery. At the year-end, the prototype has passed its safety tests, the executive committee has approved industrialisation and two carmakers have signed letters of intent. However, financing for the pilot line still depends on a bank's approval, expected in three months, and management control does not yet isolate the hours of the engineers assigned to the project. The technical director wants to capitalise all the year's expenditure; the finance director prefers to expense everything out of prudence. Write a judgement memo.L4
• Trevalia is developing a planning tool internally. All the development-phase criteria are demonstrated except one: developers' hours are not tracked by project and are buried in the IT department's overheads, with no documented allocation key. Management proposes to capitalise a lump sum estimated at half of the department's cost. What should be concluded?L2
• Ivora separately acquired an in-process battery project, recognised as an intangible asset. The project is now in its development phase and technical feasibility is demonstrated, but at the year-end Ivora has not obtained the financing needed to complete it. Development expenditure for the year amounts to 300,000. The finance director proposes to add it to the carrying amount of the project, since the project is already an asset. Which treatment should be adopted?L4
• Pyrene runs two internal projects. For project Alpha, a formal review documents the move from the research phase to the development phase. For project Beta, the work is so intertwined that no separation is possible. Which analysis is correct?L3
• On 1 June 20X1, Kestra demonstrates all the development-phase criteria for its new management software. Out of prudence, its finance director is considering continuing to expense subsequent development expenditure. Which statement is correct?L2
• At 31 December 20X1, Lumen reviews its heat pump project: the prototype has passed its endurance tests and a market study documents strong demand. Which of the following facts, if observed at that date, prevent an intangible asset arising from development from being recognised?L3
• Arvea is developing energy management software and spends {monthly_cost} on it per month throughout 20X1. It demonstrates all the development-phase criteria for the first time on 1 August 20X1. The period from January to July covers {months_before} months and the period from August to December {months_after} months. Calculate the amount capitalised and the amount recognised as an expense in 20X1.L2
• The manufacturer Selko is developing a new control valve. In 20X2, its development expenditure amounts to {q1_costs} in the first quarter, {q2_costs} in the second, {q3_costs} in the third and {q4_costs} in the fourth. Technical feasibility is demonstrated in April, but the financing needed to complete the project is obtained only on 1 July 20X2; all the other criteria have been demonstrated since the beginning of the year. The project manager wants to capitalise the expenditure from April. Calculate the amount capitalised and the amount recognised as an expense in 20X2.L3
• Norlane entrusts a subcontractor with developing a diagnostic tool. On 1 October 20X1, it gathers for the first time all the evidence required for the development phase. The subcontractor's invoices, all unpaid at the year-end, total {costs_before} for work before that date and {costs_after} for work after it. Record the summary entry for 20X1.L2
• The Ombrelle studio is developing a 3D rendering engine internally. On 1 May 20X1, it demonstrates all the development-phase criteria for the first time. The salaries owed to the developers assigned to the project amount to {salaries_before} for the period before that date and {salaries_after} for the period after it. After 1 May 20X1, Ombrelle also buys for cash {materials_after} of components and services consumed by the project. Record the summary entry for 20X1.L3
• Daxio is developing, solely for its own needs, a tool for planning its maintenance, which it has no intention of selling. At 1 March 20X1, a prototype works in real conditions, the board has decided to complete and deploy the tool, the maintenance teams are ready to use it, a study documents the expected cost savings, the budget is funded and the project hours are tracked reliably. The finance director argues that no asset can be recognised because there is no market for the tool. What position do you take?L4
• Vernat is developing scheduling software intended for sale. At the end of 20X1, the prototype is working, financing is secured, costs are tracked by project and a market study is favourable. However, a competitor has just announced a similar product and the board of directors has not yet decided whether to continue or abandon the project; no decision is expected before the next strategy committee. The project manager wants to capitalise the expenditure of the second half-year, arguing that five of the six criteria are met. Write a position memo.L4
• At 31 December 20X1, Hestia, a cosmetics group, lists the following items. Which of them are recognised as intangible assets?L3
• During the year, Ombrevalle incurred {research_costs} of research expenditure on new materials, {development_before_criteria} of development expenditure on a sensor before all the capitalisation criteria were demonstrated, then {development_capitalised} of development expenditure capitalised once the criteria were met. It also incurred {launch_advertising} of advertising for the sensor launch. What amount of research and development expenditure recognised as an expense must it disclose?L2
• In 20X2, the video game publisher Kalmira carried out an exploratory study of graphics engines for {research_costs}. It then developed a new game: {development_before_criteria} was incurred from January to April, before all the criteria were demonstrated on 1 May, and {development_capitalised} was capitalised from May to December. Finally, training the support teams for the new game cost {staff_training}. What amount of research and development expenditure recognised as an expense in 20X2 must be disclosed?L2
• Velcourt's draft notes mention 70,000 of research expenditure recognised as an expense. However, during the year, Velcourt also expensed 30,000 of development expenditure incurred before the capitalisation criteria were demonstrated, then capitalised 90,000 of development. Which amount must the notes disclose?L2