Example: Activation of development costs

A-AG is an automobile manufacturer. Due to the expected increase in demand for electric cars, A-AG began experimenting with electromechanical drivers at an early stage. For A-AG this is a new type of drive technology for their upcoming product lines. In the years 0.1 to 0.5, funds amounting to $1,000,000 spent and reported as the R&D expenses in the income statement. A new phase begins on January 1st 2006: Based on the results so far, A-AG starts developing an EdriveOne electric car, which is to be launched on January 1st 2008 series should go. The basis is the epower drive technology unit, for which in 06 (until December 31,2006) a total of $5,000,000 in personal costs were incurred (evenly distributed over the months, no other types of costs were incurred), for which patent protection was obtained on October 1, 2006. On September 1st 2006, the head of development presented the results to the board: there are no technical difficulties, the necessary development capacities for completion are available, The Board of Directors is enthusiastic and decides to release the funds for the next 5 years and announces the series start of EDriveOne for January 1st, 2008 in a press release. Except from the cart of accounts of A-AG: Bank, personnel expenses, other capitalized own work, self-created assets, other operating expenses. A-AG capitalizes at the end of each quarter in the course of preparing the quarterly financial statements.

Question 1: Were the expenses reported under R&D expenses correctly taken into the account in the annual financial statement 01 to 05?

Question 2: Are there expenses incurred in fiscal year 06 in the amount of 5,000,000 by 12/31/06 an activation obligation, an activation ban or an activation option?

Question 3: How are the $5,000,000 to be entered in the 05 financial year (in the ongoing book keeping and at the end of the quarter as part of the quarterly closing work)?