Honda Motor Company converted from U.S. GAAP to IFRS at the beginning of fiscal 2015. At that time, Honda began capitalizing new development costs. It also applied the capitalization rules of IAS 38 retroactively, recognizing development cost assets and amortization expenses as though it had capitalized these costs in earlier periods. Honda’s 2017 annual report included the following information on research and development costs incurred during the three fiscal years after the conversion to IFRS: 

Required: 

a. Suppose Honda had not switched to IFRS, but had instead continued to use U.S. GAAP in fiscal 2015. Would its R&D related expenses have been higher or lower than those that it actually reported in 2015 under IFRS? Explain your reasoning and compute the magnitude of the difference. 

b. Suppose Honda had not switched to IFRS, but had instead continued reporting under U.S. GAAP through fiscal 2017. Would its R&D-related expenses have been higher or lower in fiscal 2017 than those that it actually reported? Again, explain your reasoning and compute the magnitude of the difference. 

c. Under what circumstances would the decision to capitalize R&D expenditures decrease reported profitability compared with the full expensing system required by U.S. GAAP?

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2015 2016 2017 search and development expenditures incurred during the reporting period ¥670,331 Y719,810 Y659,918 nount capitalized (188,107) (190,992) (121,037) nortization of capitalized development costs 123,938 127,684 152,548 Total ¥606,162 ¥656,502 ¥691,429