Reference no: EM132644907

Case Study:

As a professional accountant, you work for HealthResearch. This company was incorporated with the objective of developing drugs for rare diseases. In reviewing the company's draft financial statements for the year ended 30 June 2020, you detected the following:

• Your manager has capitalised $1,500,000 of research expenditure as research and development. This expenditure is clearly "research" as per the definition in AASB138 Research Phase 54 No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred.
• 55 In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred.

56 Examples of research activities are:

(a) activities aimed at obtaining new knowledge;

(b) the search for, evaluation and final selection of, applications of research findings or other knowledge;

(c) the search for alternatives for materials, devices, products, processes, systems or services; and

(d) the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

• Therefore, this type of expenditure is to be expensed immediately as per the requirements of AASB 138 Intangible Assets.
• If this research expenditure had been recorded as per the requirements of AASB 138, the company would have made a loss of $500,000.
• You are also aware that your manager stands to receive a generous bonus for meeting prescribed profit targets.

Problem 1: In your response, consider the Code of Ethics for Professional Accountants and what would you do to resolve this situation?