Development Costs

jenny3549jenny3549 Trusted RegularPosts: 472Registered
Hi,

I was wondering if anyone would be able to help me with a query. Is there a list of qualifying expenditure for capitalising development costs?

The reason I ask is that my MD has asked me for a breakdown of all expenditure to date for this financial year involved with testing of new products. I can understand asking for raw material costs, testing fees etc but he even wants his mileage claims related to witnessing tests, hotel bills and meals etc.

It just seems a little odd that you could include items such as these as capital development costs. I know ancillary costs can be included for non-current assets (such as import duty etc) but meals.... seems to be pushing it a bit.

Any thoughts would be very welcome.

Jenny

Comments

  • Steve CollingsSteve Collings Experienced Mentor Posts: 997Registered
    SSAP 13, nor Companies Act, defines what types of development costs may be capitalised. However, the international equivalent, IAS 38, does give some guidance and says that development costs may include:

    - costs of materials and services used or consumed in generating the intangible asset
    - cost of employee benefits (as defined in IAS 19) arising from the generation of the intangible asset
    - fees to register a legal right
    - amortisation of patents and licences
    - interest (borrowing costs in accordance with IAS 23)

    Hotel bills and mileage costs would not be capitalised as part of the asset.

    Kind regards
    Steve
  • jenny3549jenny3549 Trusted Regular Posts: 472Registered
    Thanks Steve, that was my feeling but I wanted to be sure as the person advising my MD is our ex audit manager from PwC so my argument has sort of fallen on deaf ears so far.

    It puzzles me sometimes that all the standards and rules and regulations that we learn seem to be so effortlessly ignored in real life - or am I just not seeing the big picture? I freely admit that a chartered accountant with years of experience in a Big Four firm is obviously going to be far more knowledgeable than I but sometimes things seem to be so at odds that I really am lost to explain them.

    Thanks again.
  • Steve CollingsSteve Collings Experienced Mentor Posts: 997Registered
    I think the ex audit manager is considering the costs to be directly attributable to the cost of developing the intangible asset. I don't agree that such costs meet the definition of development expenditure in SSAP 13 at paragraph 21 (c) which states that development expenditure is:

    "Use of scientific or technical knowledge in order to produce new or substantially improved materials, devices, products or services, to install new processes or systems prior to the commencement of commercial production or commercial applications, or to improving substantially those already produced or installed."

    I'm also inclined to consider the fact that IAS 38 says that pre-operating costs should be written off to the income statement as incurred (IAS 38 paragraph 69). Pre-operating costs mean costs incurred in launching a new product or process of which mileage incurred to witness testing would fall to be treated as.

    However, if your boss wants the lot capitalised then so be it and leave it to your boss and the auditors to thrash it out.

    Kind regards
    Steve
  • jenny3549jenny3549 Trusted Regular Posts: 472Registered
    Thanks again Steve. You're right - as always!!

    :001_smile:
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