PAST YEAR EXAMINATION

DECEMBER 2015 (QUESTION 3)

GROUP MEMBERS: NURFARAHIN BINTI AHMAD (2017649028)

NURUL AYUNI BINTI MOHSIN (2017668528)

NURUL FARHANA BINTI ZULKIFLI (2017668544)

NURFATIN IZZATI BINTI SAIDI ( 20176388 )

SITI AISYAH BINTI HASSIM ( 2017639098 )

GROUP : AC220 3H

LECTURER : MADAM ROSNI BINTI MUDA

QUESTION 3

Aira Bhd is involved in the manufacturing of computer chips. On 1 January 2012, Aira
Bhd sent some of its staff for training and incurred costs of RM100,000. The expected
benefits derived from the training should last for eight (8) years. For the year ended
30 June 2012, Aira Bhd decided to account for training expenditure as an intangible
asset and amortised it over eight (8) years.

During the financial year ended 30 June 2012, Aira Bhd started on a research project
to develop on a computer chip. The costs incurred in the research activities includes
the cost of materials used in formulating the new computer chips of RM300,000 and
costs of external consultants services of RM500,000. Aira Bhd intends to capitalise
the research cost as similar projects conducted the previous years have always been
successful.

At the beginning of the financial year ended 30 June 2013, Aira Bhd managed to
develop a new computer chip and incurred a cost of RM50,000 but is still uncertain
about its marketability.

At the end of the financial year ended 30 June 2013, Aira Bhd had the technical
feasibility and adequate financial resources of completing the project which would
enable them to use or sell the computer chips. The costs identified in the completion
of this project consist of the following :

ITEMS RM ‘000

Fees to register the trade design 20

Amortisation of patent used in the project 80

Selling and administrative overheads allocated 150

Salaries of scientist and technicians 400

During the financial year ended 30 June 2014, development costs of RM150,000 was incurred
for the project and the criteria for capitalisation continued to be met. At the end of the financial
year ended 30 June 2014, due to unfavourable market conditions, Aira Bhd estimated that the
net recoverable amount for this project were as follows :
On 1 July 2014, further development costs of RM80,000 was incurred. The product was
launched into the market on 1 January 2015 and the expected economic life for the project is
5 years.

ITEMS RM ‘000

Revenue from sale of products 660

Related production costs of products 30

Related production marketing and selling costs 50

a) Advise Aira Bhd whether the decision made during the financial year ended 30 June
2012 comply with the requirements of MFRS 138 Intangible Asset

• Training cost of RM100,000 can not be recognize as an Intangible asset and it do not
comply with the requirements of MFRS 138 because Aira Bhd has no control over the
staff. Therefore, training cost will be written off as an expense in SOPL.

• Research cost ( cost of materials used in formulating the new computer chips and cost
of external consultants services) also do not comply with the MFRS138. These costs
which are cost of materials used in formulating the new computer of RM300,000 and
cost of external consultants services of RM500,000 will recognize as expenses and
written off in SOPL. Therefore, Aira Bhd can not capitalized as an Intangible Asset.
This is because there is uncertainty that future economic benefits that are attributable
to the assets that will flow to the entity

• Items can be capitalized as an Intangible Asset only if the following criteria are met
which are identifiable, control, future economic benefits wil flow to the entity.
b) Explain the accounting treatment for the development activities during the financial
year ended 30 June 2013.

• At the beginning of the financial year ended 30 June 2013, the cost to develop a new
computer chip of RM50,000 can not be capitalised as an Intangible Asset even though
it is development cost because it has not meet the criteria for capitalisation. So,
RM50,000 has to be written off as an expense in SOPL.

• At the end of the financial year ended 30 June 2013, development cost that can be
capitalised as an Intangible Asset consist of fees to register trade design RM20,000 ,
amortisation of patent in used in the project RM80,000 , salaries of scientist and
technicians RM400,000 . This is because these items meets the criteria for
capitalisation as probable future economic benefit will flow to the entity. So the amount
of Intangible asset is RM500,000.

• Selling and administrative overheads allocated of RM150,000 should be expensed of

as they do not relate directly to the development project

c) Explain the accounting treatment for the development costs during the financial year
ended 30 June 2014

• During the financial year ended 30 June 2014, development costs of RM150,000
incurred for the project can be capitalized as an Intangible Asset.

• Due to unfavorable market conditions, the net recoverable amount for this this project
is RM580,000 ( RM660,000 – RM30,000 – RM50,000).

• Since the carrying amount RM650,000 ( RM500,000 + RM150,000) is higher than net
recoverable amount RM580,000 , thus the development cost is impaired. Therefore,
the amount impairment loss of RM70,000 (RM650,000 – RM580,000) should be
recognize in the SOPL.

• So, the amount that can be capitalized is restricted to the net recoverable amount of
RM580,000.

d) Discuss the accounting treatment for the development costs during the financial year
ended 30 June 2015

• On 1 July 201, further development costs of RM80,000 can be capitalised as an

Intangible Asset

• Therefore, the total amount of capitalisation is RM660,000 (RM580,000 + RM80,000).

• Since the product was launched into the market on 1 January 2015, then the
development cost should be amortised over useful life which is 5 years. So, the amount
of amortisation will be RM66,000 (RM660,000/5 x 6/12) at the financial year ended 30
June 2015