CRITICAL THINKING QUESTION Required Genetic Technologies Ltd (ASX Code: GTG) wit
ID: 2594839 • Letter: C
Question
CRITICAL THINKING QUESTION
Required
Genetic Technologies Ltd (ASX Code: GTG) with a market capitalization of AUD $24.4 million as at 22 February 2017 is a biological research company that is developing gene technology in the hope of finding a vaccine for hay fever. During the current financial year, Genetic Technologies Ltd spent $2.4 million on research. You work as entry accounting graduate for the financial controller at Genetic Technologies. The CEO approaches the financial controller to discuss the profit implications of the research expenditure. The financial controller suggests that you prepare a brief to the CEO. The CEO provides you with the following additional information:
Chief scientist report: This report outlines the progress made on the project. The report indicates that the project is currently in the lab testing phase and that the project team has the required technology to complete the project. The chief scientist concludes the report by stating that the project is close to completion.
Report by the director of marketing and distribution: The report outlines a plan for using Genetic Technologies’ existing distribution network to market the vaccine.
Required
Using the AREA framework, prepare a summary of relevant facts and an evaluation of the profit implications. Discuss your findings in class to develop a brief for the CEO within your teams (adapted from Hoggett et al. 2015, Financial Accounting, 9th edition, p. 675).
ANALYSE: (30-50 words)
Identify the issue and why it matters. Determine what you need to find out.
RESEARCH: (200-250 words)
Gather relevant facts and evidence, sort all evidence, identify themes or issues and develop a data scaffold. Sort all evidence and weigh it up to start building a picture of your Answer.
EVALUATE & ANSWER: (200-250 words)
Provide your opinion of the themes or issues you have identified, justified by the evidence you have gathered and evaluated.
Explanation / Answer
Analyse -
Biological company is developing a gene for a new vaccine for which they have raised 2.4 million on a research. To keep a check on the progress of the same we need to analyse the situation and find the implication of the same.
How we are going to imply these research?
How we are going to make profit from the same?
The report will convey us how this research will impact the numbers of the accounts.
we need to find out specifically that how this 2.4 million will affect the company’s profit. How the research expenditure will be put in the books.
Research -
When sum is spent on Research expenses then we need to understand how the same will work when the same comes to an existence. Here we discuss the criteria as how the expense will be treated in near existence.Th e profit side will be affected over years by amortisation of the expenses.
In certain situations, a company can treat some of its R&D; costs as non-current assets. This process is called capitalization and requires the costs to be expensed over a set number of years. If the costs relate to tangible assets that have an alternative future use, the company depreciates the costs over the assets’ projected lifetimes. Similarly, the company amortizes capitalized costs that relate to intangible assets, such as patents and trademarks. Some development expenses, such as those for market research and consumer testing, do not count as R&D; costs.
Since the project is close to completion, now we need to understand the market need and do the analysis of the same. we need to do some sort of surveys and analysis so we can reach out to the market demands and keep our cost as per the set of requirements. After a projects close, the same is ready to go in the market and to understand how it will perform we need to understand the market needs.
We need to collect certain data and review the same that atleast in certain time period we can survive the cost we have spent on research expenses.
Evaluate-
Now we have the issues in front of us. that we have research expenses which we are going to amortise over years. But we have to analyse that certain period in which we can cover up the cost soon. R&D expenses are usually the highest for industrial, technological, health care and pharmaceutical firms. Some companies reinvest a significant portion of their profits back into R&D, as is the case with technology companies, since they see it as an investment in their continued growth. we ned to understand how we are going to increase the sale , the inventory levels and the cost of whole expenses as these three have direct impact on the same. The research investment have uncertainty involved and in this case project will be closed soon so for this project the needs should be understood properly and marketing for the same should be started so we can create. market for our product and reach out the doctors and other respective parties fr the review of the product.