Subsequent expenditure on acquired in-process R&D

Learning objectives

• Determine the treatment of expenditure incurred after the acquisition of an in-process research and development project.L3, L4
• Recognise subsequent expenditure on an acquired project according to its phase.L3

Normative references

• IAS 38 §42Subsequent expenditure on an in-process research or development project acquired separately or in a business combination is accounted for in accordance with paragraphs 54 to 62.
• IAS 38 §43Such subsequent expenditure is recognised as an expense if it is research expenditure or development expenditure that does not meet the criteria, and added to the carrying amount if the development criteria are met.

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

10 questions

• The Alto group obtains control of Brio in a business combination. Brio is carrying out a research and development project on a new material; it has always expensed this expenditure and the project is not on its balance sheet. The project is protected by patent filings and an expert estimates its fair value at 4,000,000 at the acquisition date. Alto's finance director proposes to subsume it in goodwill, since it does not appear on Brio's balance sheet. Which treatment should be used in Alto's consolidated financial statements?L4
• The Daveron group incurs the following expenditure during the year. Which item must be recognised in profit or loss as soon as it is incurred?L3
• Last year, Nephalis separately acquired an in-process research and development project on a sensor, recognised in the balance sheet as development in progress. This year, it pays {research_costs} in cash for work exploring new scientific avenues, then {development_costs} for development work incurred after all the development-phase criteria were demonstrated. Record the entry for the year.L3
• The laboratory Cerevia acquires the biotech Ostrea in a business combination. Ostrea is running a molecule project protected by patents, which it has always expensed; an expert measures its fair value at 3,000,000 at the acquisition date. After the acquisition, Cerevia continues the project: part of the work consists of exploring new scientific avenues, another part of finalising a process whose feasibility has been demonstrated. The management accountant proposes to subsume the project in goodwill and to capitalise all future expenditure, since the project is now an asset. Write a position paper.L4
• Zelia separately acquired an in-process research and development project, recognised as an intangible asset. It then incurs 200,000 of work aimed at gaining new scientific knowledge on a still exploratory application. How is this expenditure recognised?L3
• An in-process research and development project was acquired, either separately or in a business combination, and recognised as an intangible asset. Under which rules is the expenditure subsequently incurred on this project accounted for?L3
• Quarza separately acquired a medical sensor project, recorded as development in progress. In 20X1, it pays {research_costs} for research work on a new, still theoretical application and {qualifying_development} of development expenditure which, according to the file documented by management, meets all the criteria for recognising an intangible asset arising from development. Record the entries for the year (E1 for research, E2 for development).L3
• When it acquired Halden in a business combination, the Norvik group recognised autonomous navigation software under development. After the acquisition, Norvik's engineers continue the project; their salaries, still owed at the year-end, amount to {non_qualifying_development} for the period when financing for the rest of the project was not yet secured, then to {qualifying_development} for the period when all the development-phase criteria were demonstrated. Record the entries (E1 then E2).L3
• The laboratory Pharmalis acquired an in-process vaccine project for 1,200,000. During the following year, it incurs 150,000 of research studies on another indication, 80,000 of development from January to April, a period during which not all the development-phase criteria were demonstrated, and 220,000 of development from May to December, once all the criteria were demonstrated. What amount is added to the carrying amount of the project for the year?L4
• 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