Case Study Intangibles

Case Study Intangibles - MEMO 1 MEMO To Sophisticated...

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MEMO - 1 MEMO To: Sophisticated Software, Inc. Accounting Department From: Charles Morrison, Auditor Re: US GAAP & IFRS - Rules for Capitalizing Software Development Costs Date: December 6, 20XX --------------------------------------------------------------------------------------------------------------------- IFRS Capitalizing costs for an intangible asset uses rules that are divided into one research phase and one development phase. Each phase has different standards on determining a cost to be capitalized or expensed. These rules apply to only internally generated assets. The standards for the research phase are more simplified than the standards for the development phase. IAS 38 states in the research phase, “no intangible asset arising from research (or from the research phase of an internal project) shall be recognized (Paragraph 54).” Additionally in the research phase, any expenditure incurred towards the asset during the research time period will be expensed. The development phase for certain expenses must fulfill the conditions to be capitalized according to paragraph 57 in IAS 38, “the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete the intangible asset and use or sell it, its ability to use or sell the intangible asset, how the intangible asset will generate probable future economic benefits, the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset, and its ability to measure reliably the expenditure attributable to the intangible asset during its development.” Paragraph 68 in IAS 38 states, with the exception of two different scenarios, expenditures will always be expensed regarding an intangible asset. The first scenario explains a cost for an asset shouldn’t be expensed if it’s included in the cost for an intangible asset when meeting the recognition criteria.
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