Jaguar Land Rover Automotive PLC (JLR) is a maker of luxury autos based in Coventry, United Kingdom. JLR uses IFRS and has a fiscal year-end of March 31. You have been asked to use your knowledge of IFRS to convert key metrics for the company to a U.S. GAAP basis. For simplicity, you may assume that the only material differences between JLR’s as-reported numbers and those it would report under U.S. GAAP are traceable to its policy of capitalizing development costs.

Internally Generated Intangible Assets (from Footnote 2, Accounting Policies)

Research costs are charged to the consolidated income statement in the year in which they are incurred.

Product development costs incurred on new vehicle platforms, engines, transmission and new products are recognised as intangible assets—when feasibility has been established, the Group has committed technical, financial and other resources to complete the development and it is probable that the asset will generate future economic benefits.

The costs capitalised include the cost of materials, direct labour and directly attributable overhead expenditure incurred up to the date the asset is available for use.

Interest cost incurred is capitalised up to the date the asset is ready for its intended use, based on borrowings incurred specifically for financing the asset or the weighted average rate of all other borrowings, if no specific borrowings have been incurred for the asset.

Product development cost is amortised over a period of between two and ten years.

Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment loss, if any.

Amortisation is not recorded on product development in progress until development is complete.

Research and Development (from Footnote 11)

Year ended 31 March	2017 (£ millions)
Total research and development costs incurred	1,794
Research and development expensed	(368)
Development costs capitalized	1,426

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Intangible Assets (selections from Footnote 18)

Cost	Product Development in Progress (£ millions)	Capitalized Product Development (£ millions)
Balance at 31 March 2016	1,539	4,525
Additions—internally developed	1,426	–
Transfers	(809)	809
Disposals	–	(138)
Balance at 31 March 2017	2,156	5,196
Amortization
Balance at 31 March 2016	–	1,635
Amortization for the year	–	769
Disposals	–	(138)
Balance at 31 March 2017	–	2,266
Net book value at 31 March 2017	2,156	2,930

Required:

1. What percentage of R&D expenditures was capitalized during the fiscal year ending March 31, 2017? How does this percentage compare with the capitalization ratios of the German automakers profiled in Exhibit 4.4?

2. Estimate the average useful life of product development costs by dividing average capitalized product development costs by the amortization expense for fiscal 2016–2017. Compute average capitalized product development costs as simple average balances at the beginning and end of each fiscal year. Does your estimate fall within the range of the useful lives for development costs disclosed in the accounting policy footnote?

3. The table below contains metrics as reported in JLR’s three primary financial statements. Convert these metrics to a U.S. GAAP basis. Where necessary assume that JLR’s tax rate is 21.1 percent, a rate disclosed in Footnote 14, Taxation.

	As Reported (IFRS) (£ millions)	U.S. GAAP
Profit before tax	1,610
Net profit (after tax)	1,272
Total assets	10,962
Shareholders’ equity	6,581
Operating cash flow	3,160
Capital expenditures*	3,056