In latest annual report of the company, it includes a page of voluntarily disclosureabout the efficiency of the company’s research programs. Results indicate that the company’s prosperity depends on the development of new products and this can be a long term ongoing process.
The company often funded academic research studies into theoretical areas in order to maintain its technical lead. Some of the studies led to breakthroughs which enabled LG to patent and develop into new product ideas. The company argues that the money consumed in this way as a good investment because for every tenunsuccessful projects there is usually at least one valuable finding which generates enough profit to cover the whole cost of the research activities. Unfortunately, it is impossible to tell in advance which project would succeed in this way.
A major shareholder of the company expressed dissatisfaction at LG’s policy of writing off research cost in this manner. He felt that it would be disproportionately pessimistic if company earned a good return from its research activities. He felt that the company should depart from the requirements of IAS-38 in order to achieve a fair presentation.
a. You are required to mention three reasons which arguewhy it might be justifiable for LG to capitalize its research cost?
b. Explain briefly why IAS-38 compels a rigid set of structure which prevents the capitalization of all research expendituresand make it difficult to capitalize development expenditures?