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R&d cost having substantial amount is revenue or capital exp

Rubul (Student) (151 Points)

23 September 2012  

Dear member Please explain and let me know if the following expense is in nature of Capital or Revenue Expenditure?

XYZ co.( a manufaturer of car) has purchased two imported car for Rs. 2000000/- and used it for research and development (that is, for mass production of similar model cars). After R&D the imported car is destroyed by XYZ co. on its own. The Car is Destroyed in the year of Purchase.

 

Now my question is that wheather the co. should write off full amount of Rs.2000000/- in its p&l, since the car is no more physicaly present and prima facie the co. has not availed benefit of the car for more than a year

                                                                    OR

 

should the co. capitalise the amount of Rs.2000000/- and amortise the amount yearly in its P&L, since the knowledge acquired by the co. after R&D of said car will benefit the co. for more than 5 years


 4 Replies

Prakash Popat (3129 Points)
Replied 23 September 2012

In order to adhere with consistency priciple better to follow past practise OR Else Both Option Allowed.

CA.Vinita Gupta (Deputy Manager- Finance)   (2913 Points)
Replied 23 September 2012

Since the Asset ceases to exists in the FY itself its better to Charge it off to Expenses

CA K. PAPNEJA SFM and FR FAC'LTY (NA) (128 Points)
Replied 23 September 2012

Dear Rubul,

this query is goverened by PARA 40-47  & 63 of AS-26. Broadly ,  according to these PARA:

To capitalise the  cost of  R&D the enterprise must demonstrate all of the following:

a.       the technical feasibility of completing the intangible asset( in ur case production process for new cars) so that it will be available for use or sale;

b.       its intention to complete the intangible asset and use or sell it;

c.       its ability to use or sell the intangible asset;

d.       how the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;

e.       the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

f.         its ability to measure the expenditure attributable to the intangible asset during its development reliably.

In brief if it can be demonstrated that  the manufacture fo new  cars is technicaly,commercialy & financially feasible the cost of cars used should be capitalised along with with other expenses on R&D ,VIZ: Rent or depreciation of building used  for R&D, salaries of research staff etc. It is irerlevant whether car is destroyed with in one year, because it will be treated in the nature fo material used for  R&D.(though i wud like to know more facts on the manner of destruction of the cars) 

 Unless there is persuasive evidence otherwise and by satisfying conditions of PARA -63 of AS-26,There is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use. Though by ur facts it seems techonology used for  new cars will have life of 5 yeasrs it should be written of over 5 years , being shorter than maximum permitted 10 years.

However, if the manufacture OF new cars is not technically,commercialy or financially feasible , in such a case the cost of cars should be w/off to P&L as failed Research  under PARA 40 of AS-26.

1 Like

Rubul (Student) (151 Points)
Replied 24 September 2012

THANKS A LOT MEMBERS. Specialy to CA. K Papneja for his valuable comments.


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