ACA ICAEW Financial Accounting and Reporting Practice Exam

Recognizing development costs as intangible assets requires meeting specific criteria outlined in accounting standards, primarily IAS 38. The correct answer emphasizes the necessity of demonstrating both the existence of a market for the product and the capacity to reliably measure development costs.

To recognize these costs as an intangible asset, an entity must show that the project is technically feasible and will generate future economic benefits. This typically involves proving that the market exists for the developed asset, meaning there is demand or a potential customer base. Additionally, reliable measurement of costs associated with the development process is crucial, as it enables the entity to determine the financial impact of the investment accurately.

In contrast, merely having a profitable asset within a year, completing development within two years, or the blanket capitalization of all developed assets does not align with the specific criteria needed for recognition. Profitability can take longer than one year and does not guarantee that the costs can be reliably measured or that a market exists. Imposing a time limit on the completion of development does not encompass the broader considerations set forth by accounting standards that prioritize feasibility, market existence, and reliable measurement over arbitrary time frames or conditions. Thus, the emphasis on market existence and cost measurement underpins the recognition process in a way that supports sound financial reporting practices.