Under IFRS firms can capitalize development outlays, whereas under US GAAP such outlays must be

expensed as incurred. In its 2008 IFRS-based financial statements, Philips Electronics recognized a development

asset of E 357 million (E 518 million in 2007). The company’s development expenditures amounted to

E 233, E 259, E 295, E 233, and E 154 million in 2004, 2005, 2006, 2007, and 2008, respectively. In these years,

total R&D expenditures were E 1,615, E 1,602, E 1,659, E 1,629, and E 1,622 million, respectively. Philips’ statutory

tax rate is 25.5 percent.

a  Estimate the average expected life of Philips’ investments in development at the end of 2008.

b  Using the estimate derived under a, what adjustments should an analyst make to the 2008 beginning balance

sheet and 2008 income statement to immediately expense all development outlays and derecognize

the development asset?

c  What adjustments should be made to the 2008 beginning balance sheet and 2008 income statement to recognize

an asset for both research and development investments? Assume that the average expected life of

Philips’ investments in research at the end of 2007 and 2008 is equal to that of Philips’ development investments

at the end of 2008.

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