ExpertACCA · Question 02 · Strategic Business Reporting
SECTION A
Background:
NovaGene is a highly innovative biotechnology startup. The company is currently seeking a Series B funding round from venture capitalists. The funding is contingent upon NovaGene demonstrating a strong balance sheet and meeting specific asset-to-debt covenants.
During the year ended 31 March 20X5, NovaGene incurred $8 million in costs related to early-stage clinical trials for a new gene therapy. The technical feasibility of the therapy is still highly uncertain, and regulatory approval is at least three years away. The CFO has instructed the financial accountant to capitalise $5 million of these costs as 'Development Expenditure' under IAS 38 Intangible Assets, arguing that the therapy has massive commercial potential.
Furthermore, to improve liquidity, the CFO arranged a transaction involving NovaGene's main laboratory building. The building was 'sold' to a financial institution for $20 million (its fair value) and immediately leased back for 15 years. The lease terms dictate that NovaGene retains all risks and rewards of the building, and there is a mandatory repurchase clause at the end of the lease term. The CFO has instructed the accountant to derecognise the building and recognise the $20 million as revenue from a contract with a customer under IFRS 15.
The financial accountant is a qualified ACCA member and feels uncomfortable with these instructions.
Required:
(a) Discuss the correct financial reporting treatment for the clinical trial costs (IAS 38) and the sale and leaseback transaction (IFRS 15 / IFRS 16). (12 marks)
(b) Evaluate the ethical issues faced by the financial accountant and advise on the appropriate actions they should take in accordance with the ACCA Code of Ethics and Conduct. (8 marks)
SECTION A
Background:
NovaGene is a highly innovative biotechnology startup. The company is currently seeking a Series B funding round from venture capitalists. The funding is contingent upon NovaGene demonstrating a strong balance sheet and meeting specific asset-to-debt covenants.
During the year ended 31 March 20X5, NovaGene incurred $8 million in costs related to early-stage clinical trials for a new gene therapy. The technical feasibility of the therapy is still highly uncertain, and regulatory approval is at least three years away. The CFO has instructed the financial accountant to capitalise $5 million of these costs as 'Development Expenditure' under IAS 38 Intangible Assets, arguing that the therapy has massive commercial potential.
Furthermore, to improve liquidity, the CFO arranged a transaction involving NovaGene's main laboratory building. The building was 'sold' to a financial institution for $20 million (its fair value) and immediately leased back for 15 years. The lease terms dictate that NovaGene retains all risks and rewards of the building, and there is a mandatory repurchase clause at the end of the lease term. The CFO has instructed the accountant to derecognise the building and recognise the $20 million as revenue from a contract with a customer under IFRS 15.
The financial accountant is a qualified ACCA member and feels uncomfortable with these instructions.
Required:
(a) Discuss the correct financial reporting treatment for the clinical trial costs (IAS 38) and the sale and leaseback transaction (IFRS 15 / IFRS 16). (12 marks)
(b) Evaluate the ethical issues faced by the financial accountant and advise on the appropriate actions they should take in accordance with the ACCA Code of Ethics and Conduct. (8 marks)
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