GeneTech Ltd is a biological research company that is developing gene technology in the hope of finding a vaccine for skin cancer. During the last financial year, GeneTech Ltd spent $1.2 million on research. The scientists involved in the project believe they may be on the right track with the research, although many other companies are claiming the same thing and as yet no one has patented a vaccine. The Chief Executive Officer (CEO) is fully supportive of the scientist team and believes that the $1.2 million should be regarded as a capital cost. The Chief Financial Officer (CFO) recommends that the cost be treated as an expense.

Required:

1. Do you agree with the CEO or the CFO? Explain why.

2. Suppose GeneTech Ltd records the cost as a capital cost. Outline the effect of the decision on the Statement of Financial Performance.

3. Suppose the CFO disagreed with the CEO about reporting the cost of research as capital. Explain why this may be regarded as an ethical dilemma for the CFO.