Question $2$:

Orange Drugs is a pharmaceutical company which develops new products with other pharmaceutical companies that have the appropriate production facilities.

Stakes in development projects

When Orange Drugs 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 product development is complete and it has been approved by the authorities. In the financial statements for the year ended $31$ August $2016,$ Orange Drugs has treated the different stakes in the development projects as separate intangible assets because of the anticipated future economic benefits related to Orange Drug's ownership of the product rights. However, in the year to $31$ August $2017,$ the directors of Orange Drugs 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 recognized as intangible assets. This write$-$off was to be treated as a change in an accounting estimate.

Sale of development project

On $1$ September $2015,$ Orange Drugs acquired a development project as part of a business combination and correctly recognized the project as an intangible asset. However, in the financial statements to $31$ August $2016,$ Orange Drugs recognized an impairment loss for the full amount of the intangible asset because of the uncertainties surrounding the completion of the project. During the year ended $31$ August $2017,$ the directors of Orange Drugs judged that it could not complete the project on its own and could not find a suitable entity to jointly develop it$.$ Thus, Orange Drugs decided to sell the project, including all rights to future development. Orange Drugs succeeded in

selling the project and, as the project had a nil carrying value, it treated the sale proceeds as revenue in the financial statements. The directors of Orange Drugs argued that IFRS $15$ Revenue from Contracts with Customers states that revenue should be recognized when control is passed at a point in time. The directors of Orange Drugs argued that the sale of the rights was part of their business model and that control of the project had passed to the purchaser.

Required:

$($i$)$ Explain the criteria in both the $2010$ version of the Conceptual Framework for Financial Reporting $($the Conceptual Framework$)$ of the International Accounting Standards Board and the $2015$ proposed revision to the Conceptual Framework for the recognition of an asset and whether the criteria are the same in IAS $38$ Intangible Assets. $(5$ marks$)$

$($ii$)$ Discuss the implications for Orange Drug's financial statements for both the years ended $31$ August $2016$ and $2017$ if the recognition criteria in IAS $38$ 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. $(5$ marks$)$

$($iii$)$ Discuss whether the proceeds of the sale of the development project above should be treated as revenue in the financial statements for the year ended $31$ August $2017.$