Question

Case Study As a professional accountant, you work for Optimistic Ltd. Optimistic Ltd was incorporated with the objective of developing designer drugs to meet the needs of an ageing population. In reviewing the company’s draft financial statements for the year ended 30 June 2017, you detected the following: • Your manager has capitalised $1,000,000 of research expenditure as research and development. This expenditure is clearly “research” as per the definition in AASB138 Research Phase 54 No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred. 55 In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred. 56 Examples of research activities are: o (a) activities aimed at obtaining new knowledge; o (b) the search for, evaluation and final selection of, applications of research findings or other knowledge; o (c) the search for alternatives for materials, devices, products, processes, systems or services; and o (d) the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services. • Therefore this type of expenditure is to be expensed immediately as per the requirements of AASB 138 Intangible Assets. • If this research expenditure had been recorded as per the requirements of AASB 138, the company would have made a loss of $500,000. • You are also aware that your manager stands to receive a generous bonus for meeting prescribed profit targets. QUESTION: In your capacity as a professional accountant, how would you personally handle this situation – what would be your first step, second step, etc? • Would you speak to anyone about this situation? • In your response, consider the Code of Ethics for Professional Accountants? • What would you do to resolve this situation?

Answer 1

• I would first speak to my manager about my concerns regarding capitalization of research expenditure & try to quote AASB 138 to convince her in most rational manner. If she doesn’t agree, I would escalate the matter to her senior.
• As per Code of Ethics, highest level of integrity & honesty should be exercised while discharging duties. Further, professional competence is of utmost importance. Thus, knowing about a wrong accounting treatment materially affecting firm's financial statements & not taking any action about it would be ethically incorrect.
• As mentioned earlier, I would have a healthy discussion with my manager based on facts. If she doesn’t agree, I would bring this issue to light in front of higher management.