Reference no: EM132940599

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                           670,331                      719,810             659,918
incurred during the reporting period..................
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?