Problem
DOHAN (PTY) LTD is an electronics and software developing and distribution company. During the current reporting period the Research & Development unit reported the following:
• Mr. Damonse developed as software product while carrying out his normal services. He presented his software product to management and requested that he be paid an amount of R 3 million for the development. Management was not happy to pay the amount because the product was developed during working hours for which Mr. Damonse was paid. Based on recent case law, Mr. Damonse informed management that he may have to pursue the matter via the legal route. The attorneys advised management that the matter should be settled out of court, and that a counteroffer of R 2.5 million should be made. The matter was only settled four months after the reporting date whereby the company paid an amount of R 2.75 million. Furthermore, legal fees of R 360 000 were incurred relating to settling the matter. Ms. Sikele, the accountant, stated that the amount paid to the employee for the development of the software products cannot be recognised as an intangible asset because the development was not planned therefore the costs cannot be determined reliably.
• The company concluded an agreement with an international Research & Development company for the rights to use its Research & Development software programme at at cost of R 4 million. The agreement grants the company the rights to use the programme for a period of three years with the option to extend the agreement for a further three years at a cost of R 2.1 million. Ms. Sikele, that accountant stated that the rights to use the programme should be recognised at the total costs, including the cost of extending the agreement, which should be amortised over the extended period of the agreement.
You are required to:
• Discuss whether the statement made by Ms. Sikele that the amount paid to the employee for the development of the software cannot be recognised as an intangible asset is correct in compliance with the accounting standards.
• Discuss how the amount request of Mr. Damonse to be paid for the development of the software product should be recognised in the financial statements for the current reporting period in compliance with the accounting standards.
• Discuss whether the statement made by Ms. Sikele that the rights to use the programme purchased should be recognised at the total cost and amortised over the extended period of the agreement is correct in compliance with the accounting standards.