Research and Development-Financial Reporting

question 2

Essay

Research and development-financial reporting
Alert Industries has spent $5 billion over the last three years in developing a new drug labeled BJ13. FDA approval is expected by the end of the month, at which time the drug will be available for sale. None of Alert's competitors has a product similar to BJ13, and the medical community is anxiously awaiting availability of this drug. Although BJ13 promises to be a "wonder drug" with huge financial success, Alert's income statements for the last few years have shown substantial losses and Alert's statement of financial position only includes $ 0.3 billion product BJ13 among the assets of the business.
Explain why one of Alert's seemingly most valuable assets apparently has been reported for only $0.3 billion in the statement of financial position, and why Alert's income statements for the past few years reported substantial losses.
IFRS currently require that amounts spent for research be expensed as incurred and amounts spent for development be capitalized as intangible assets if and only if all the following six specific recognition criteria are met:
1. The technical feasibility of completing the intangible asset for use or sale;
2. The entity intends to complete the intangible asset and use or sell it;
3. The entity has the ability to use or sell the intangible asset;
4. How the intangible asset will generate probable future economic benefits, for example, the existence of a market for the output of the intangible asset, or the usefulness of the intangible asset for internal purpose;
5. The availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset; and
6. The entity's ability to measure reliably the expenditure attributable to the intangible asset during its development.

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Definitions:

Discharge By Agreement

Agreement by the parties that a contract is ended.

Discharge By Frustration

The termination of a contract due to unexpected events which render the performance of the contract impossible or radically different.

Condition Subsequent

A condition in a contract that, when fulfilled, can terminate the contract’s obligations or bring it to an end.

Full Force And Effect

A legal term indicating that all terms of a contract or law are currently active and enforceable.