Question three.

An entity has incurred has incurred the following expenditure during the current year.

a. Shs 100,000,000 spent on the initial design work of a new product. It is anticipated that this design will be taken forward over the next two year period to be developed and tested with a view to production in three years time.

b. Shs 500,000,000 spent on the testing of a new production system which has has been designed internally and which will be in operation during the following accounting year. This new system should reduce the costs of production by 20%.

Required.

(a) Explain the term intangible asset in accordance with IAS 38:Intangible Assets. (2 mark)

(b) Discuss the criteria for recognition of intangible assets in the financial statements of CUL and indicate the basis of subsequent measurement in accordance with IAS 38. (12marks)

(c) How should each of these costs be treated in the financial statements of the entity. (6 marks)