I. Allegheny- Asset recognition

Allegheny Technologies reports under U.S. GAAP. In Note 1 (Summary of Significant Accounting Policies) of its 2001 annual report, Allegheny states:

"Company funded research and development costs were $11.3 million in 2001, $13.6 million in 2000 and $15.2 million in 1999"

Please ignore any tax effects when answering the questions below.

1.What do you think is Allegheny's accounting policy with respect to R&D? Please justify your answer.

2.An alternative policy would be for Allegheny to capitalize R&D as an asset and amortize it over its estimated useful life. On a pro forma basis, calculate the amount Allegheny would show as R&D expense in 2001 if you were to assume a three year useful life and straight-line amortization. For purposes of this calculation, assume R&D costs are incurred at the beginning of each fiscal year and thus amortization is recorded for the full year.

3.Under the capitalization policy described in question (2) above, what would be the amount of capitalized R&D costs shown on the balance sheet as of December 31, 2000 and December 31, 2001?

4.What effect would capitalising R&D costs have on Allegheny's net income in fiscal year 2001 relative to its current treatment of R&D?

5.As of December 31, 2001, what is the cumulative difference net income that would have been reported by Allegheny under the capitalization policy relative to its current policy?

6.Firms reporting under IFRS can choose between fair value or historical cost accounting for different types of non-financial assets. Please discuss possible factors that may influence a firm's decision to opt for fair value as opposed to historical cost when accounting for these assets. Support your discussion on prior research when possible.