Reference no: EM132918971

You are the accountant of ABC Ltd, a listed Australian entity which prepares consolidated financial statements in accordance with Australian Accounting Standard Board (AASB). You have recently prepared draft of the financial statements for the year ended 30 June 2021 and these are due to be published shortly. The chief executive officer (CEO), who is not an accountant, reviewed these financial statements and has a query arising out of the review.

Problem 1: Question from the CEO to you: As you know, in the year to June 2021, we spent considerable sums of money designing a new product. We spent the six months from July 2020 to December 2020 researching into the feasibility of the product. We charged these research costs to profit or loss account. However, from January 2021, we were confident that this product would be commercially successful, and Page 6 of 10 we fully committed ourselves to financing its future development. We spent the rest of the year developing the product, which we will begin to sell in the next few months. These development costs have been recognised as intangible assets in our statement of financial position. How can this be right when all these research and development costs are design costs? Please justify this with reference to relevant accounting standards.