Question 2
 
  Myriad has recently adopted the use of IAS and a review of its existing policy of prudently writing off of all development expenditure is no longer considered appropriate under IAS38 Intangible Assets. The new policy, to be first applied for the financial statements to 30 September 2005, is to recognize development costs as an intangible asset where they comply with the requirements of IAS38. Amortization of all ‘qualifying’ development expenditure is on a straight-line basis over a four-year period (assuming a nil residual value). Recognized development expenditure ‘qualifies’ for amortization when the project starts commercial production of the related product.
 
  The amount of recognized development expenditure and the amount qualifying for amortization each year is as follows:
 
  mount recognized Amount qualifying
 
  As an asset   for amortization
 
  $000        $000
 
  In the year to 30 September 2003 420         300In the year to 30 September 2004 250         360In the year to 30 September 2005 560         4001230        1060
 
  No development costs were incurred by Myriad prior to 2003.
 
  Assuming accumulated profits on 1 October 2003 is $1 million.
 
  Changes in accounting policies should be accounted for in accordance with IAS8 Accounting Polices, Changes in Accounting Estimates and Errors.
 
  Required:
 
  Prepare extracts of Myriad’s financial statements for the year to 30 September 2005 including the comparative figure to reflect the change in accounting policy.
 
  Solution:
 
  Income statement year to:
 
  30 Sept, 2005 30 Sept, 2004 (restated)
 
  $000         $000
 
  Amortization     265          165Balance sheet as at:
 
  Intangible non-current assets
 
  Development
 
  expenditure – cost  1230         670- Amortization (505)       (240)
 
  - NBV      725         430Accumulated profit 1 October2003          1000Prior period adjustment               345Accumulated profit 1 October 2003 (restated)   1345Working:
 
  Amortization of development expenditure each year:
 
  2003 300/4=75
 
  2004 (300+360)/4=165
 
  2005 (300+360+400)/4=265
 
  In accordance with IAS8 the change in accounting policy should be applied retrospectively as if the new policy had always existed, which involves restating the comparative accounts and the retained profits b/f in the comparative accounts. The amount of the prior period adjustment would be the net book value of the development expenditure of $345000 (420000 – 75000) that would have been included in the balance sheet at 30 Sept, 2003.