Reference no: EM132935576

Honda Motor Company converted from U.S. GAAP to IFRS at the beginning of fiscal 2015. At  that time, Honda began capitalizing new development costs. It also applied the capitalization  rules of IAS 38 retroactively, recognizing development cost assets and amortization expenses as  though it had capitalized these costs in earlier periods.

Honda's 2017 annual report included the following information on research and development costs incurred during the three fiscal years after the conversion to IFRS:

                                                                                               2015            2016                2017
Research and development expenditures
incurred during the reporting period..................            670,331      719,810          659,918

Amount capitalized.......................................            (188,107)      (190,992)     (121,037)

Amortization of capitalized development costs.......         123,938          127,684        152,548

Total.......................................................               606,162             656,502           691,429

Required:

Problem a. Suppose Honda had not switched to IFRS but had instead continued to use U.S. GAAP in  fiscal 2015. Would its R&D-related expense have been higher or lower than those that it  reported in 2015 under IFRS? Explain your reasoning and compute the magnitude of the  difference.

Problem b. Suppose Honda had not switched to IFRS but had instead continued reporting under U.S. GAAP through fiscal 2017. Would its R&D-related expenses have been higher or lower in  fiscal 2017 than those that it reported? Again, explain your reasoning and compute the  magnitude of the difference.

Problem c. Under what circumstances would the decision to capitalize R&D expenditures decrease reported profitability compared with the full expensing system required by U.S. GAAP?