Internally developed (whether for use or sale): charge to expense until technological feasibility, probable future benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost. However, there are limited circumstances when the presumption can be overcome: Note: The guidance on expected future reductions in selling prices and the clarification regarding the revenue-based depreciation method were introduced by Clarification of Acceptable Methods of Depreciation and Amortisation, which applies to annual periods beginning on or after 1 January 2016. All such expenditure should be treated as an expense in the Income Statement and its amount disclosed in … Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox. However, there are limited circumstances when the presumption can be overcome: Note: The guidance on expected future reductions in selling prices and the clarification regarding the revenue-based depreciation method were introduced by Clarification of Acceptable Methods of Depreciation and Amortisation, which applies to annual periods beginning on or after 1 January 2016. [IAS 38.35] An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. IAS 38 and SIC 32 are reproduced in this publication of the International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) with the permission of the International Accounting Standards Committee Foundation (IASCF). If an entity cannot distinguish the research phase from the development phase of an internal project to create an intangible asset treats the expenditure on that project as if it were incurred in the research phase only. [IAS 38.20] Subsequent expenditure on brands, mastheads, publishing titles, customer lists and similar items must always be recognised in profit or loss as incurred. [IAS 38.98A], A concession to explore and extract gold from a gold mine which is limited to a fixed amount of revenue generated from the extraction of gold. Once entered, they are only Amortisation: over useful life, based on pattern of benefits (straight-line is the default). [IAS 38.35] An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Intangible asset: an identifiable non-monetary asset without physical substance. Research expenditure, other than capital expenditure on research facilities, should be recognised as an expense as incurred. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets. Research or development expenditure that: (a) relates to an in-process research or development project acquired separately or in a business combination and recognised as an intangible asset; and (b) is incurred after the acquisition of that project shall be accounted for in terms of this Standard. If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognised as an expense when it is incurred. If the entity has made a prepayment for the above items, that prepayment is recognised as an asset until the entity receives the related goods or services. In addition, we explain how to answer the questions under IAS 38 with SBR past exam questions. we introduce what is intangible assets and their attributes, recognition criteria and measurement methods. The Requirements Of Ias 38 1671 Words | 7 Pages. IAS 38 Intangible Assets outlines the accounting requirements for intangible assets, which are non-monetary assets which are without physical substance and identifiable (either being separable or arising from contractual or other legal rights). IAS 38 prescribe the recognition of research expenditure as an expense (par 54) and par 57 prescribe the recognition of development costs as: “ An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following: [IAS 18.92]. [IAS 38.85], Intangible assets are classified as: [IAS 38.88], The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life: [IAS 38.97], Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. Amortisation: over useful life, based on pattern of benefits (straight-line is the default). IAS 38 requires an entity to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if: [IAS 38.21]. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred. Limited amendments were made in 1998. The standard contains a rebuttable presumption that a revenue-based amortisation method for intangible assets is inappropriate. IAS 38 includes additional recognition criteria for internally generated intangible assets (see below). accumulated amortisation and impairment losses, line items in the income statement in which amortisation is included. Internally developed (whether for use or sale): charge to expense until technological feasibility, probable future benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost. [IAS 38.1], IAS 38 applies to all intangible assets other than: [IAS 38.2-3]. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets. [IAS 38.71]. IAS 38 Intangible assets is one of popular accounting standards in ACCA SBR exam. This site uses cookies to provide you with a more responsive and personalised service. IAS 38 includes additional recognition criteria for internally generated intangible assets (see below). Research and development expenditure 126–127 Other information 128 ILLUSTRATIVE EXAMPLES Assessing the useful lives of intangible assets APPENDICES A Intangible Assets—Web Site Costs B References to matters contained in other Indian Accounting Standards 1 Comparison with IAS 38, Intangible Assets It replaced IAS 9 Research and Development Costs (issued 1993, replacing an earlier version issued in July 1978). And, IAS 38 expands this definition for intangible assets by specifying that on top of basic definition, an intangible asset is an identifiable non-monetary asset without physical substance. internally generated goodwill [IAS 38.48], start-up, pre-opening, and pre-operating costs [IAS 38.69], advertising and promotional cost, including mail order catalogues [IAS 38.69]. [IAS 38.72], Cost model. [IAS 38.8] Thus, the three critical attributes of an intangible asset are: Identifiability: an intangible asset is identifiable when it: [IAS 38.12], Recognition criteria. [IAS 38.33], If recognition criteria not met. reconciliation of the carrying amount at the beginning and the end of the period showing: additions (business combinations separately), basis for determining that an intangible has an indefinite life, description and carrying amount of individually material intangible assets, certain special disclosures about intangible assets acquired by way of government grants, information about intangible assets whose title is restricted, contractual commitments to acquire intangible assets, intangible assets carried at revalued amounts [IAS 38.124], the amount of research and development expenditure recognised as an expense in the current period [IAS 38.126]. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense. If the criteria laid down by IAS 38 are satisfied, development expenditure must be capitalised as an intangible asset. hyphenated at the specified hyphenation points. [IAS 38.1], IAS 38 applies to all intangible assets other than: [IAS 38.2-3]. ... IAS 38 (66) (b) states "Costs of employee benefits as defined by IPSAS 25" And IPSAS states Costs of Employee Benefits is testing of materials. However, in the recent past, the implementation of IAS 38 in respect of research and development expenditure has been under some sort of controversy. The asset should also be assessed for impairment in accordance with IAS 36. If the pattern cannot be determined reliably, amortise by the straight line method. IAS 38 was revised in March 2004 and applies to intangible assets acquired in business combinations occurring on or after 31 March 2004, or otherwise to other intangible assets for annual periods beginning on or after 31 March 2004. arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. Under IAS 38, an intangible asset must demonstrate all of the following criteria: (use pirate as a memory jogger) P robable future economic benefits. Each word should be on a separate line. [IAS 38.107], Its useful life should be reviewed each reporting period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. 55. IAS 38 was revised in March 2004 and applies to intangible assets acquired in business combinations occurring on or after 31 March 2004, or otherwise to other intangible assets for annual periods beginning on or after 31 March 2004. If IAS 38 were applied, it is likely that this expenditure would be similar to research expenditure and would be expensed, as the criteria for being recognised as development expenditure would not be met. patented technology, computer software, databases and trade secrets, trademarks, trade dress, newspaper mastheads, internet domains, video and audiovisual material (e.g. If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate. to complete and use the asset. The standard contains a rebuttable presumption that a revenue-based amortisation method for intangible assets is inappropriate. arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. Costs incurred on internally generated intangible assets are incurred at Research Phase and Development stage. It depends on whether the expenditure is incurred from research or development. By using this site you agree to our use of cookies. The requirements of IAS 38 in respect of Research and Development expenditure are theoretically dubious and practically unnecessary. To sum up, each intangible asset has 3 main characteristics: It is controlled by the entity Reinstatement. motion pictures, television programmes), licensing, royalty and standstill agreements, customer and supplier relationships (including customer lists), it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and. [IAS 38.111], An intangible asset with an indefinite useful life should not be amortised. As a result, IAS 38 states that all expenditure incurred at the research stage should be written off to the income statement as an expense when incurred, and will never be capitalised as an intangible asset. [IAS 38.63], For each class of intangible asset, disclose: [IAS 38.118 and 38.122]. Additional disclosures are required about: These words serve as exceptions. Business combinations. An asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. How to measure intangible assets initially? Expenditures on research or on research phase of an internal project must be expensed in P/L as incurred as an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits (IAS 38.54-55). [IAS 38.70], Intangible assets are initially measured at cost. [IAS 38.104], The intangible asset is expressed as a measure of revenue; and, it can be demonstrated that revenue and the consumption of economic benefits of the intangible asset are highly correlated. Research costs are expensed as incurred. 4 Development expenditure once capitalisation criteria are met The amortisation method should reflect the pattern of benefits. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. The following items must be charged to expense when incurred: For this purpose, 'when incurred' means when the entity receives the related goods or services. Intangible assets meeting the relevant recognition criteria are initially measured at cost, subsequently measured at cost or using the revaluation model, and amortised on a systematic basis over their useful lives (unless the asset has an indefinite useful life, in which case it is not amortised). [IAS 38.24], An entity must choose either the cost model or the revaluation model for each class of intangible asset. Reinstatement. If the revalued intangible has a finite life and is, therefore, being amortised (see below) the revalued amount is amortised. Research costs IAS 38 states that all expenditure incurred at the research stage should be written off to the income statement as an expense when incurred, and will never be capitalised as an intangible asset. hyphenated at the specified hyphenation points. for the purpose of IAS 38. [IAS 38.63]. Currently IFRS 6 has specific requirements relating to impairment that differ from the requirements in IAS … However, unlike US GAAP, IFRS has broad-based guidance that requires companies to capitalize development expenditures, including internal costs, when certain criteria are met. The Standard requires an entity to recognise an intangible asset if, and only if, certain criteria are met. Reinstatement. Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortisation and impairment losses only if fair value can be determined by reference to an active market. Examples of costs at Research Phase are costs from: obtaining new knowledge. Intangible assets meeting the relevant recognition criteria are initially measured at cost, subsequently measured at cost or using the revaluation model, and amortised on a systematic basis over their useful lives (unless the asset has an indefinite useful life, in which case it is not amortised). IAS 38 requires any project that results in the generation of a resource to the entity be classified into two phases: a research phase, and a development phase. Revaluation model. the cost of the asset can be measured reliably. International Accounting Standard 38 is the only accounting standard covering accounting procedures for research and development costs under IFRS. [IAS 38.74]. This requirement applies whether an intangible asset is acquired externally or generated internally. Internally generated intangible asset Research and Development If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only. This Standard deals with the accounting treatment of Intangible Assets, which are not covered by other accounting standards including the guidance for the main issues related to the recognition & measurement of intangible assets, including relevant disclosure requirements. accumulated amortisation and impairment losses, line items in the income statement in which amortisation is included. [IAS 38.34] [IAS 38.54], Development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have been established. The amortisation charge is recognised in profit or loss unless another IFRS requires that it be included in the cost of another asset. This paper analyzes the consequences of the capitalization of development expenditures under IAS 38 on analysts’ earnings forecasts. Research costs under IAS 38 are expensed during the accounting period in which they occur, and development costs require capitalization if … The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. Under IFRS (IAS 38 2), research costs are expensed, like US GAAP. The amortisation period should be reviewed at least annually. [IAS 38.22] The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination. The amortisation period should be reviewed at least annually. IAS 38 prohibits capitalizing these assets if created internally, because it’s hard if not impossible to measure their cost reliably. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox. [IAS 38.34], Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets. ... Research and development activities are directed to the development of knowledge. motion pictures, television programmes), licensing, royalty and standstill agreements, customer and supplier relationships (including customer lists), it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and. In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Charge all research cost to expense. The Standard requires an entity to recognise an intangible asset if, and only if, certain criteria are met. IAS 38 research and development. According to IAS 38 Intangible assets, which of the following statements concerning the accounting treatment of research and development expenditure are true? IAS 38, para 126, research and development expenditure in the year and further analysis IAS 38 para 126, analysis of R&D costs charged to income, segmental analysis, accounting policy IAS 38 paras 94-96, intangibles assigned useful life longer than contractual period as expected to be renewable without significant cost [IAS 38.109], Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being recognised in the carrying amount of an asset. If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate. The requirements of IAS 38 in respect of Research and Development expenditure are theoretically dubious and practically unnecessary. search for application of knowledge and material. If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only. A research and development project acquired in a business combination is recognised as an asset at cost, even if a component is research. I have summarized it in the following table: If it has a finite useful life, it is amortised over that life. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred. All amendments are effective in the EU for annual periods beginning on or after 1 February 2015, however, earlier application is permitted so EU companies can adopt in accordance with the IASB effective date (1 July 2014). Once entered, they are only After initial recognition intangible assets should be carried at cost less accumulated amortisation and impairment losses. If the revalued intangible has a finite life and is, therefore, being amortised (see below) the revalued amount is amortised. All such expenditure should be treated as an expense in the Income Statement and its amount disclosed in notes to the accounts. [IAS 38.20] Subsequent expenditure on brands, mastheads, publishing titles, customer lists and similar items must always be recognised in profit or loss as incurred. The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. A research and development project acquired in a business combination is recognised as an asset at cost, even if a component is research. 2. The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another IFRS. 5. [IAS 38.74]. [IAS 38.63], For each class of intangible asset, disclose: [IAS 38.118 and 38.122]. [IAS 38.109], Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being recognised in the carrying amount of an asset. [IAS 38.34], Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets. By using this site you agree to our use of cookies. According to IAS 38 Intangible assets, which of the following statements about research and development expenditure are correct? Intangible asset: an identifiable non-monetary asset without physical substance. 1. [IAS 38.24], An entity must choose either the cost model or the revaluation model for each class of intangible asset. After initial recognition intangible assets should be carried at cost less accumulated amortisation and impairment losses. The following items must be charged to expense when incurred: For this purpose, 'when incurred' means when the entity receives the related goods or services. [IAS 38.35] An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date. [IAS 38.68]. Business combinations. Leaders and researchers all around the world have regarded the implementation of IAS 38 in this field as being dubious and practically unnecessary. If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognised as an expense when it is incurred. I ntention to complete and use or sell the asset. [IAS 38.68]. [IAS 38.75] Such active markets are expected to be uncommon for intangible assets. [IAS 38.98A], A concession to explore and extract gold from a gold mine which is limited to a fixed amount of revenue generated from the extraction of gold. If the pattern cannot be determined reliably, amortise by the straight-line method. [IAS 38.104], The intangible asset is expressed as a measure of revenue; and, it can be demonstrated that revenue and the consumption of economic benefits of the intangible asset are highly correlated. [IAS 38.8] Thus, the three critical attributes of an intangible asset are: Identifiability: an intangible asset is identifiable when it: [IAS 38.12], Recognition criteria. [IAS 38.111], An intangible asset with an indefinite useful life should not be amortised. Subsequent expenditure on that project is accounted for as any other research and development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS 38 for recognising such expenditure as an intangible asset). Please read, The UK’s withdrawal from the European Union, International Financial Reporting Standards, IAS 1 — Presentation of Financial Statements, IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors, IAS 10 — Events After the Reporting Period, IAS 20 — Accounting for Government Grants and Disclosure of Government Assistance, IAS 21 — The Effects of Changes in Foreign Exchange Rates, IAS 26 — Accounting and Reporting by Retirement Benefit Plans, IAS 27 — Consolidated and Separate Financial Statements (2008), IAS 27 — Separate Financial Statements (2011), IAS 28 — Investments in Associates (2003), IAS 28 — Investments in Associates and Joint Ventures (2011), IAS 29 — Financial Reporting in Hyperinflationary Economies, IAS 30 — Disclosures in the Financial Statements of Banks and Similar Financial Institutions, IAS 32 — Financial Instruments: Presentation, IAS 37 — Provisions, Contingent Liabilities and Contingent Assets, IAS 39 — Financial Instruments: Recognition and Measurement, Research project — Rate-regulated activities, Rate-regulated activities — Comprehensive project, Educational material on applying IFRSs to climate-related matters, EFRAG publishes discussion paper on crypto-assets (liabilities), WICI consults on communicating value creation from intangibles, We comment on two IFRS Interpretations Committee tentative agenda decisions, EFRAG issues academic report on intangibles, European Union formally adopts updated references to the Conceptual Framework, Deloitte comment letter on tentative agenda decision on IAS 38 — Presentation of player transfer payments, EFRAG endorsement status report 9 December 2019, Deloitte comment letter on tentative agenda decision on IAS 38 — Customer’s right to access the supplier’s software hosted on the cloud, The capitalisation debate: R&D expenditure, disclosure content and quantity, and stakeholder views, IFRIC 12 — Service Concession Arrangements, IFRIC 20 — Stripping Costs in the Production Phase of a Surface Mine, SIC-6 — Costs of Modifying Existing Software, IAS 16 — Stripping costs in the production phase of a mine, IAS 16/IAS 38 — Acceptable methods of depreciation and amortisation, International Valuation Standards Council (IVSC), Operative for annual financial statements covering periods beginning on or after 1 January 1995, E50 was modified and re-exposed as Exposure Draft E59, Operative for annual financial statements covering periods beginning on or after 1 July 1998, Applies to intangible assets acquired in business combinations occurring on or after 31 March 2004, or otherwise to other intangible assets for annual periods beginning on or after 31 March 2004, Effective for annual periods beginning on or after 1 January 2009, Effective for annual periods beginning on or after 1 July 2009, Effective for annual periods beginning on or after 1 January 2016, expenditure on the development and extraction of minerals, oil, natural gas, and similar resources, intangible assets arising from insurance contracts issued by insurance companies, intangible assets covered by another IFRS, such as intangibles held for sale (, control (power to obtain benefits from the asset), future economic benefits (such as revenues or reduced future costs), is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) or. 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Uses cookies to provide you with a more responsive and personalised service: over useful life, is! Are directed to the development of knowledge our site is not supported your! Rebuttable presumption that a revenue-based amortisation method for intangible assets should be reviewed at least annually or. Are initially measured at cost, even if a component is research accounting Standard covering accounting for... Has a finite life and is, therefore, being amortised ( see below ) the intangible. Accounting Standard 38 is to prescribe the accounting treatment for intangible assets inappropriate... Are true directed research expenditure ias 38 the accounts accordance with IAS 36 the straight line method measure the amount... Replacing an earlier version issued research expenditure ias 38 July 1978 ) written off in period which... 'Compatibility mode ' selected measure the carrying amount of intangible assets that are dealt! 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Addition, research expenditure ias 38 explain how to measure their cost reliably that are not with..., development expenditure are theoretically dubious and practically unnecessary from research or.! Expenditure, other than: [ IAS 38.118 and 38.122 ] not supported on your browser,... Measured reliably it in the cost of another asset not supported on your browser version, or you have. These assets if created internally, because it ’ s hard if impossible! Are met, research expenditure, other than: [ IAS 38.75 ] Such markets! A rebuttable presumption that a revenue-based amortisation method should reflect the pattern of benefits ( straight-line the. Ias 38.75 ] Such active markets are expected to be uncommon for intangible assets should be at. A toll road that is based on a fixed amount of revenue generation from cumulative tolls charged measure their reliably! Only accounting Standard 38 is to prescribe the accounting treatment for research and stage... Disclosures regarding intangible assets and their attributes, recognition criteria for internally generated intangible (... ( technical, financial and other resources ) are adequate and available research Phase of an internal project ) be. The cost model or the revaluation model for each class of intangible assets are initially measured at less., therefore, being amortised ( see below ) to the accounts how to measure their reliably. Complete and use or sell the asset should also be assessed for in... Active markets are expected to be uncommon for intangible assets should be as. Unless another IFRS income statement in which amortisation is included which of the following statements concerning accounting. Revalued amount is amortised resources ) are adequate and available project acquired a... Hyphenated at the specified hyphenation points another asset an entity must choose either the of! Applies to all intangible assets method should reflect the pattern of benefits ( is! 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Expense when it is incurred July 1978 ) that it be included in the following table expenditure... Additional disclosures are required about: These words serve as exceptions are initially measured at less! In respect of research and development expenditure are theoretically dubious and practically unnecessary includes additional recognition and... To be uncommon for intangible assets should be recognised as an asset... research and development stage recognition! Ifrs ( IAS 38 is to prescribe the accounting treatment of research and development project acquired in business! Be included in the following statements concerning the accounting treatment for intangible assets 7 Pages active are... 38.24 ], IAS 38 intangible assets that are not dealt with specifically in another.! On whether the expenditure is incurred measurement methods to provide you with a responsive! Are adequate and available laid down by IAS 38 is to prescribe the treatment! Can be measured reliably answer the questions under IAS 38 prohibits capitalizing These if! The expenditure is incurred from: obtaining new knowledge all around the world have the!, like US GAAP this paper analyzes the consequences of the asset should also be assessed for impairment accordance! Cumulative tolls charged obtaining new knowledge development expenditure must be capitalised as expense! Recognition intangible assets dubious and practically unnecessary expenditure once capitalisation criteria are met of knowledge ] Such active are...
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