Chapter 9 Summary: Intangible Noncurrent Assets

Intangible Noncurrent Assets: Research and Development Expenditure

Research Expenditure

• Research expenditure is typically treated as an expense.
• It does not meet the definition of an asset because there's no guarantee of future economic benefit.
• Any money spent on pure research is written off in the year it's incurred.
• Journal entry: Debit research expense, credit bank.

Development Expenditure

• Development expenditure can be capitalized as an intangible noncurrent asset if it meets the definition of an asset and satisfies all the criteria of "PIRATE."
• Capitalization means recording the expenditure as an asset on the statement of financial position rather than an expense on the income statement.

PIRATE Criteria

• To capitalize development expenditure, it must meet the "PIRATE" criteria:
  • Probable future economic benefit: The expenditure is expected to generate income.
  • Intention to complete and use or sell: There's a clear intention to finish the development and either use the resulting asset within the business or sell it.
  • Resources available to complete: The business has the necessary resources to finish the development.
  • Ability to use or sell: The business is able to use or sell the asset once completed.
  • Technically feasible: The asset can actually be made; the idea isn't impractical.
  • Expenditure can be reliably measured: The costs associated with the development can be accurately determined.

Capitalization as an Intangible Noncurrent Asset

• If the development expenditure meets all PIRATE criteria, it's capitalized as an intangible noncurrent asset on the statement of financial position.
• Journal entry: Debit intangible noncurrent assets, credit bank/payables.

Amortization

• Once capitalized, the intangible asset is amortized (the equivalent of depreciation for tangible assets).
• If the intangible asset has a finite life (i.e., it won't last forever), it's amortized over that life.
• Journal entry: Debit amortization expense (in the statement of profit or loss), credit intangible noncurrent assets (in the statement of financial position).