Pritchard Ltd prepares its financial statements to 31 December each year. At 1 January 2021 Pritchard Ltd had capitalised development expenditure of 15 million and accumulated amortisation of 5.5 million in relation to existing projects. The companys policy for the amortisation of deferred development expenses is straight line over 5 years and research and development costs charged against profit in the year are charged to cost of sales. Pritchard Ltd started on a new project which commenced on 1 January 2021. During the year ended 31 December 2021 the company incurred more research and development costs on this project. The research stage of the new project lasted until 31 March 2021 and costs incurred were 1.2 million. Thereafter the project entered into the development stage and Pritchard Ltd incurred costs of 750,000 per month but the success of the project was at that time still uncertain. On 1 August 2021 the directors became confident that the project would be successful and would return a profit in excess of costs. At 31 December 2021 the project is still in the development stage.

Required

(a) Briefly explain the accounting treatment of pure and applied research costs, and development expenditure, in accordance with IAS 38 Intangible assets. 8 marks

(b) Prepare extracts from Pritchard Ltds financial statements for the year ended 31 December 2021 showing the effect of the research and development activities of the company.