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Development costs 1. How does the accounting for development costs differ between IFRS and U.S. GAAP?

Answer: U.S. GAAP Development Costs under U.S. GAAP are expensed as incurred unless addressed by a separate standard. Development costs related to computer software for external use are capitalized. While for internal use, only costs during the application development stage may be capitalized. The Development Costs position can be found in Income Statement in Expense part. Revaluation is not permitted IFRS Development costs under IFRS are capitalized when technical and economic feasibility of a project can be demonstrated in accordance with specific criteria. There is no separate guidance addressing computer software development costs.

The development costs position can be found in Statement of Financial Position, in Assets part. Revaluation to fair value of intangible assets other than goodwill is a permitted accounting policy election for a class of intangible assets. Acquired in-process research and Acquired in-process research and development: Determine fair development: Recognized as a value and expense immediately if finite life intangible asset no alternative future use. separately from goodwill if the definition of an intangible asset is met and the fair value can be measured reliably.
2. How important are development costs in explaining the difference in Nokias net income and shareholders equity under IFRS versus U.S. GAAP for the years 1994-2006? In general, what would cause development-cost reconciliation items to increase or decrease? Answer: The development costs in explaining the difference in Nokias net income and shareholders equity is quite important, cause based on the analysis in the case, over the entire period, as well as the most recent year ending

December, 31 2006, the most significant, adjustments to net income relates to development costs.

3. In 2003, the company eliminated certain ongoing research and development projects to improve its profitability. This involved writing off capitalized R&D costs and incurring restructuring and impairment costs. Why do the write-off and restructuring and impairment costs. Why do the write-off and restructuring costs result in a positive adjustments to IFRS net income to arrive at U.S. GAAP net income? Answer:

4. Questions: a) Does the accounting difference for development costs between IFRS and U.S. GAAP have a cash flow impact? b) Might this accounting difference have a valuation impact? Explain.

If research and development is a significant line item then again IFRS and US GAAP vary in their treatment of this. Most research costs are expensed under both models. However, for the case of development costs significant differences arise. Under IFRS these costs can be capitalized if certain criteria is met such as commercial feasibility and resources to proceed are met whereas generally under US GAAP Research and Development is generally expensed although some exceptions exist in the software industry.