Reference no: EM132555105

Gama-Smith, a pharmaceutical company, develops new drugs for COVID-19 with other pharmaceutical companies that have the appropriate production facilities. When Gama-Smith acquires a stake in a development project, it makes an initial payment to the other pharmaceutical company. It then makes a series of further stage payments until the drug development is finish and it has been approved by the relevant authorities. In the financial statements for the year ended 30 June 2019, Gama-Smith has treated the different stakes in the development projects as separate intangible assets because of the anticipated future economic benefits related to Gama-Smith's ownership of the drug rights. However, in the year to 30 June 2020, the directors of Gama-Smith decided that all such intangible assets were to be expensed as research and development costs as they were unsure as to whether the payments should have been initially recognised as intangible assets.

This write off was to be treated as a change in an accounting estimate.

Required:

Question a) Explain the difference between 'research' and 'development' in the context of AASB 138 Intangible Assets without examples.

Question b) Discuss the implications for Gama-Smith's financial statements for both the years ended 30 June 2019 and 2020 if the recognition criteria in AASB 138 for an intangible asset were met as regards the stakes in the development projects above. Your answer should also briefly consider the implications if the recognition criteria were not met