Reference no: EM132591606

Question 1: AMN Ltd incurred costs of £800,000 regarding research and development activities in fiscal year 2018. Based on IAS 38, AMN Ltd decided to write off as an expense £300,000 for activities conducted during the research phase, and to recognize as an intangible asset £500,000 for activities conducted during the development phase.

For the subsequent measurement of the intangible asset, AMN Ltd chose the cost model. For the amortization of the intangible asset, AMN Ltd chose the straight-line method and assumed a useful life of 10 years and a residual value of zero. In fiscal year 2019, expectations about future economic benefits generated by the intangible asset suddenly worsened. A competitor of AMN Ltd appears to have developed a similar asset with higher-quality features. At the end of fiscal year 2019, AMN Ltd estimated the recoverable amount of the intangible asset to be £200,000.

Required:

i) Provide examples of activities for the research and development phases that AMN Ltd could have conducted in fiscal year 2018. Be specific and explain each example. There is no need to repeat the recognition criteria [from a)] or to define the research and development phase.

ii) Prepare the journal entries relating to the research and development activities in fiscal year 2018.

iii) Describe the required accounting treatment for fiscal year 2019. Explain each step and prepare journal entries for each step.

Question 2: Considering the decisions AMN Ltd had to make in b), where do you see opportunities for earnings management? Briefly explain what earnings management is and describe at least two different examples applicable to this situation.