On January 1, Year One, a pharmaceutical company starts work on creating three n
ID: 2600979 • Letter: O
Question
On January 1, Year One, a pharmaceutical company starts work on creating three new medicines that could lead to valuable products. The company will spend millions on each project and would not undertake this endeavor if it did not believe that it has a reasonable chance of recovering its investment. Historically for this company, one out of every three new projects actually became a successful product on the market. If that happens, the company expects to generate over $10 million in revenue at a minimum. By the end of Year One, the company spent exactly $1 million in research and development for each of three projects. Based on a careful evaluation, company officials believe the first project has a 30 percent chance of success, the second project has a 60 percent chance of success, and the third project has a 90 percent chance of success. a. Assume U.S. GAAP does not have an official standard in this area of accounting. Provide as many viable methods as possible to record the $3 million cost that has been incurred to date. For each, provide at least one reason the method could be appropriate. b. How does U.S. GAAP account for the $3 million in costs incurred here for research and development? c. How does IFRS account for the $3 million in costs incurred here for research and development?
Explanation / Answer
A). There are different methods available for this situation.
1). we can treat it as expense. Expense means it will affect income statement as one time when it is occured.
2). or we can treat it as capitalized assets. If it is capitalized then we will amortize the asset based on the life of it.
B). Under US GAAP account we should treat it as expense.
C).under IFRS research cost is expensed while the development cost is capitalized if it meets certain criteiria.
Since we do not have specifically how much each for research and development we will consider total $3 as expense.