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Since Prister’s headquarters are in Townsville, Queensland, Australia, the most appropriate choice of accounting standards would be the Australian Accounting Standards Board (AASB). Indeed, International Financial Reporting Standards (IFRS) are equally relevant, yet AASB complies with them and provides more specificity for the region of the firm under discussion. Specifically, project Gagner and the different costs incurred in its realization are to be examined further.
The beginning of the project was in 2018 when the research of mRNA was launched in the firm. At this stage and this year, the costs incurred in the project could not be classified as intangible assets and should be treated as expenses. Namely, the mRNA structure’s study and vaccine development do not correspond to the requirements for being an intangible asset. These criteria include “identifiability, control and the existence of future economic benefits” (Henderson et al. 2017, p. 326). According to AASB 138, research is seen as a process of gaining some knowledge without any financial benefits (Australian Accounting Standards Board 2019, para. 8). Thus, the study of the nature of mRNA, as well as the decision for further development of mRNA-based vaccines, could not be treated as internally developing intangible assets. However, the expense-and-reinstate method might be applicable for the accounting for this period, which supposes later recognition of some costs as assets (Henderson et al. 2017, p. 335). In this case, $10 million spent researching mRNA types to develop vaccines could be reinstated.
Next, the costs incurred in 2019 for the project Gagner are to be surveyed. In this year, the company’s initiatives in the project could be said to enter the development phase. In AASB 138 (AASB, 2019 para. 8), development is “the application of research findings… to… design for the production of new… products… before the start of commercial production.” The project Gagner could be recognized to be in the development phase since there is a market for vaccines because of the frequency of Hepatitis F and the need for its treatment. Moreover, the preliminary testing of vaccines demonstrated their promising effects. However, the costs incurred for the project could not be recognized as intangible assets yet. The conditions for doing so include the technical feasibility, willingness of the company to fulfill the development, ability to use the asset, and the monetary benefits of its production (AASB 2019, para. 57). In 2019, the clinical testing of the vaccines was not complete, so the product could not be stated as an intangible asset, although all the other conditions were met.
In 2020, the development of the project Gagner rapidly grew into a new stage. In June, the mRNA vaccine testing demonstrated the product’s efficiency. Additionally, the legal status of the discovered medication was supported by Intellectual Property protection in due course. From this moment on, the project can be considered an intangible asset, and its incurred costs can be capitalized. The project complies with the definition of the expenditure category of development since it has future economic benefits, is controlled by the company, and is identified as a separate non-monetary project. Moreover, the technical aspects of the development of the vaccines are of satisfying quality since the testing was provided. Next, the company clearly aims to further continue the project and receive approval for production from the authorities. Additionally, the resources for production are available and ready for use by the company since it prepares the launch of mass production. Accordingly, from June 2020, the project Gagner’s costs can be capitalized, and some of the previous expenses reinstated.
Unfortunately, the testing results indicated that the developed vaccines might have harmful effects on people who consume them. Since the authorities have suspended their project approval, financing further investigation would be more complicated. However, since the project’s cost is not counted as an expense, its stakeholders might be more willing to support their asset’s development. Therefore, the choice of accounting method is beneficial for the further improvement of vaccines.
The proposal of the company’s CFO to change the classification of the cryonics license might have different effects on the company’s financial statement. After changing the license classification, the company would obtain a new intangible asset with indefinite economic life. Then, the objects that correspond to AASB 138 criteria for being intangible assets should be treated differently. Namely, the asset is acquired separately from the company and should be measured at its cost (AASB 2019, para. 24). The license corresponds to the AASB criteria for intangible assets. Precisely, it is identified as a separate asset that the company can control. Moreover, its future financial benefits are evident for the organization since it already has a market for the service, and the asset’s cost is measured. Therefore, the cryonics license is an appropriate project for being classified as an intangible asset.
The decision to change the classification of the license involves several consequences. First of all, the recognition of the new intangible asset would add to the company’s value. Furthermore, it can enhance its goodwill which adds price to its integral value and prestige (Henderson et al. 2017). Yet, a disadvantage of such classification lies in the probability of managerial neglecting of the cryonics license strategy. The asset might become overvalued if no strategic decisions would support its further capitalization. Therefore, the renovation of the classification can result in the beneficial financial state of the company as well as in the failure of treatment.
The statement of income of the company can be calculated in accordance with non-GAAP methods. The reason behind the use of such methods is that it would create a more positive and clear image of income for investors and stakeholders of the company. First of all, the company included $7 million of government grants as an income according to non-GAAP constant currency revenues. Next, the amortization was calculated according to the legal life of the patent for intangible assets instead of economic ones so that it would not be more than $3,000. Additionally, the amortization cost in 2019 was increased and should be subtracted. Moreover, the GAAP allowance for doubtful accounts should be reduced by half (GAAP $508 versus non-GAAP $254) and subtracted from the expenses. With all of these remarks in mind, the income from continuing operations would be 9,653 instead of 501.
Finally, the reason behind the decision of the company’s top management to use non-GAAP disclosures lies in the fact that the firm experienced significant losses. Namely, its expenditures and COVID-related problems worsened the income in 2020 so the company resolved to present its income in the best view for the stakeholders. Leung and Veenman (2018) research also suggests that firms experiencing losses are more flexible and predictable, and investors prefer a non-GAAP picture of financial position. In turn, some managers tend to use non-GAAP methods to the justification of their opportunistic behavior: to increase the income of the company for their annual bonuses (Visani et al. 2020). However, in my personal judgment, the decision of the top managers is related to the misfortunes brought about by the COVID-19 outburst. Probably, managers wanted to present the financial data in brighter light while assessing the strategic possibilities of the company. Thus, the managers considered the high expenses to be temporal difficulties that should not intervene with the general performance of the firm.
Reference List
Australian Accounting Standards Board 2019, AASB 138.
Henderson, S, Peirson, G, Herbohn, K, Artiach, T, & Howieson, B 2017, Issues in financial accounting, Ed. 16th, Pearson Education Australia.
Leung, E, & Veenman, D 2018, “Non-GAAP earnings disclosure in loss firms”, Journal of Accounting Research, 56, 4, pp. 1083–1137.
Visani, F, Lascio, FML, & Gardini, S 2020, “The impact of institutional and cultural factors on the use of non-GAAP financial measures. International evidence from the oil and gas industry”, Journal of International Accounting, Auditing and Taxation, 40, p. 100334.
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