MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
Bainsworth Forent, CFO
Weiren Xi, Controller
May 15, 2013
SOLUTIONS TO THREE MISRAH’S DIET PILL R&D ISSUES UNDER IFRS
As you requested, I have researched several accounting standards to provide you with solutions to three
Research & Development (R&D) issues under the IFRS (2013). Here are my recommendations, with their
governing accounting standards:
1. Regarding the issue of reporting previous R&D costs with its first IFRS filing, Misrah should prepare
and present an opening IFRS (2013) statement of financial position at the date of transition to the
IFRS (2013) (IFRS 1, para. 6). Also, Misrah should restate its prior years’ financial statements with
comparative information and explain how the transition from the previous GAAP to the IFRS (2013)
affected its previously reported financial position, financial performance and cash flows (IFRS 1, para.
21 and 23). Furthermore, Misrah should reclassify items that are recognized differently under the
IFRS (2013) and the previous GAAP, and recognize the adjustments directly in retained earnings at
the date of transition to the IFRS (2013) (IFRS 1, para. 10 and 11). Therefore, in its first IFRS (2013)
financial statements, Misrah should report the R&D costs presented on prior years’ financial
statements with comparative information and recognize resulting adjustments of transaction from the
previous GAAP to the IFRS (2013).
2. Misrah should use the IFRS (2013) because the IFRS (2013) and the GAAP recognize the R&D costs
differently, therefore using the IFRS (2013) is more reasonable after the adoption to the IFRS (2013)
(IASB 38, para. 54 and 57). In addition, according to the IFRS (2013), Misrah should track future
R&D using same accounting policies in its opening IFRS (2013) statement of financial position and
throughout all periods presented in its first IFRS (2013) financial statement (IFRS 1, para. 7).
3. The IFRS (2013) and the GAAP recognize the R&D costs differently. Under the IFRS (2013), Misrah
should recognize research costs as an expense, but recognize development costs as an intangible asset.
Under the IFRS (2013), expenditure on research should be recognized as an expense when it is
incurred since an entity cannot demonstrate that an existing intangible asset will generate possible
future economic benefits (IASB 38, para. 54 and 55). In contrast, development costs should be
recognized as an intangible asset if an entity is able to demonstrate that an intangible asset exists, and
it will generate possible future economic benefits (IASB 38, para. 57 and 58). According to diet pill’s
expected timeline, the experiment on mice and tests for two prototypes demonstrated that Misrah did
not know which prototype would be effective and possible for manufacturing. Thus, before February
10, 2013, Misrah was not able to demonstrate its technical feasibility to complete the intangible asset
and future economic benefits. However, after February 10, 2013, Misrah chose one of two prototypes
and started manufacturing for future sale. Therefore, the total incurred research costs are $700,000 for
experiment and tests, and development costs are $300,000 for manufacturing costs. In comparison,
under the GAAP, Misrah should recognize all the R&D costs as an expense, because at the time most
research and development costs are incurred, the future benefits are uncertain (FASB 2013, ASC para.
730-10-05-2 and 730-10-25-1). Therefore, under the GAAP, Misrah should recognize all the R&D
costs as an expense.
If you need further assistance regarding these matters, please call me at Ext. 245.
Bainsworth Forent,
CFO
May 15, 2013
Page 2
REFERENCES
Financial Accounting Standards Board (FASB). (2013). Accounting Standards
Codification (ASC) paragraph 730-10-05-2, Research and Development – Overall – Overall and
Background. Retrieved May 14, 2013, from http://asc.fasb.org/
Financial Accounting Standards Board (FASB). (2013). Accounting Standards
Codification (ASC) paragraph 730-10-25-1, Research and Development – Overall – Recognition.
Retrieved May 14, 2013, from http://asc.fasb.org/
International Accounting Standards Board (IASB). (2013). International Accounting Standard 38,
Intangible Assets.
International Accounting Standards Board (IASB). (2013). International Financial Reporting Standard 1,
First Time Adoption of International Financial Reporting Standards.