Nov Laboratories Limited has been involved in pharmaceuticals research projects for 15 years.

The managing director has expressed concern that the variability in the level of research and development expenditure has distorted the reported profits for the company over the past five years. The following information is available:

1. Research and development expenditure over the past five years has been analysed as follows:

2. The company depreciates all property, plant and equipment on the straight-line basis over 10 years, but writes off all other expenditure as incurred. The only non-current asset acquired prior to 2013 was plant, costing €200,000 and purchased in 2010.
3. The company is planning to acquire €300,000 of new property, plant and equipment in connection with its research and development activities over the next two years. In addition, it is anticipated that research and development expenditure will average €400,000 p.a. over the next five years. Approximately 70% of this expenditure will be classified as development expenditure.
Requirement As financial director of Nov Laboratories Limited, prepare a memorandum addressed to the managing director on the current accounting policy of the company, any possible changes that could be implemented and their impact on the company’s reported results. (Assume any development costs that are to be capitalised are amortised over five years.)

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Year ended 31 December Property, Plant and Equipment Acquired Research Costs Development Costs 2013 50,000 445,000 125,000 2014 150,000 77,000 150,000 2015 210,000 40,000 215,000 2016 125,000 160,000 2017 88,000 145,000