A company incurs costs on an internal project after establishing that it has, among other things, technical feasibility, intent and ability to complete the asset, a way to use or sell it, and reliable measurement of the related expenditure. Under IAS 38, and separately under ASC 730, how are these development-stage costs treated?
- IAS 38 requires expensing all such costs as incurred, while ASC 730 permits capitalizing them once the criteria are met
- Both IAS 38 and ASC 730 require these costs to be expensed as incurred, with no capitalization option
- IAS 38 requires these costs to be capitalized once all specified criteria are demonstrated, while ASC 730 generally requires research and development costs to be expensed as incurred
- Both IAS 38 and ASC 730 require these costs to be capitalized once technical feasibility is demonstrated
Why C? And why not the others?
Correct answer: C. IAS 38 requires these costs to be capitalized once all specified criteria are demonstrated, while ASC 730 generally requires research and development costs to be expensed as incurred
IAS 38 sets out six specific criteria an entity must demonstrate before development expenditure can be recognized as an intangible asset: technical feasibility of completing the asset, intention to complete it, ability to use or sell it, how it will generate probable future economic benefits, availability of adequate technical, financial and other resources, and the ability to measure the attributable expenditure reliably. Once all six are demonstrated, capitalization of further development costs is required, not merely permitted. ASC 730, by contrast, generally requires research and development costs to be charged to expense as incurred, reflecting a US GAAP view that the outcome of R&D activity is too uncertain to support asset recognition, aside from narrow exceptions such as certain capitalized software costs outside the scope of ASC 730 itself. The option describing the frameworks in reverse order is wrong because it attributes the expense-as-incurred rule to IAS 38 and the capitalization option to ASC 730, which inverts each standard's actual treatment. The option treating both frameworks as requiring expensing is wrong because it ignores IAS 38's mandatory capitalization once its criteria are met. The option treating both frameworks as requiring capitalization is wrong because ASC 730's default rule for research and development costs is expensing, not capitalization, regardless of technical feasibility.
Source: IFRS Foundation, IAS 38 Intangible Assets, paragraphs 57-58 (development cost recognition criteria); FASB Accounting Standards Codification ASC 730-10-25 Research and Development (costs charged to expense when incurred)