Gama-Smith, a pharmaceutical company, develops new drugs for COVID-19 with other pharmaceutical

companies that have the appropriate production facilities.

When Gama-Smith acquires a stake in a development project, it makes an initial payment to the other

pharmaceutical company. It then makes a series of further stage payments until the drug development is

complete and it has been approved by the relevant authorities. In the financial statements for the year ended

30 June 2019, Gama-Smith has treated the different stakes in the development projects as separate intangible

assets because of the anticipated future economic benefits related to Gama-Smiths ownership of the drug

rights. However, in the year to 30 June 2020, the directors of Gama-Smith decided that all such intangible

assets were to be expensed as research and development costs as they were unsure as to whether the payments

should have been initially recognised as intangible assets. This write off was to be treated as a change in an

accounting estimate.

Required:

a) Explain the difference between research and development in the context of AASB 138 Intangible

Assets without examples. (3 marks)

b) Discuss the implications for Gama-Smiths financial statements for both the years ended 30 June

2019 and 2020 if the recognition criteria in AASB 138 for an intangible asset were met as regards

the stakes in the development projects above. Your answer should also briefly consider the

implications if the recognition criteria were not met. (10 marks)

Part B (10 marks)

External disclosure of information on intangibles is useful only if it is understood and is relevant to investors.

It appears that investors are increasingly interested in and understand disclosures relating to intangibles. A

concern is that, due to the nature of disclosure requirements of AASB standards, investors may feel that the

information disclosed has limited usefulness, thereby making comparisons between companies difficult.

Many companies spend a huge amount of capital on intangible investment, which is mainly developed within

the company and thus may not be reported. Often, it is not obvious that intangibles can be valued or even

separately identified for accounting purposes. The current Integrated Reporting Framework may be one way

to solve this problem.5

Required:

(i) Discuss the potential issues which investors may have with:

the choice of accounting policy of cost or revaluation models, allowed under AASB 138 Intangible

Assets, for intangible assets;

the capitalisation of development expenditure.

(7 Marks)

(ii) Discuss whether integrated reporting can enhance the current reporting requirements for intangible

assets. (3 marks)