Pharma-Mart is currently undertaking research in hopes of developing a drug to prevent cavities.If the company is successful, they expect to start selling the drug in five years' time.Under IFRS, what is the effect of the current accounting policies with respect to research on their net income, currently and in five years' time when they start to sell the drug?
$\begin{array}{ll}&\text { Current year }&\text { In } 5 \text { Years }\\hline
A.&\text { Overstated } & \text { Overstated } \
B.&\text { Overstated } & \text { Understated } \
C.&\text { Understated } & \text { Overstated } \
D.&\text { Understated } & \text { Understated }
\end{array}$

Question

Pharma-Mart is currently undertaking research in hopes of developing a drug to prevent cavities.If the company is successful, they expect to start selling the drug in five years' time.Under IFRS, what is the effect of the current accounting policies with respect to research on their net income, currently and in five years' time when they start to sell the drug? 
$\begin{array}{ll}&\text { Current year }&\text { In } 5 \text { Years }\\hline
A.&\text { Overstated } & \text { Overstated } \
B.&\text { Overstated } & \text { Understated } \
C.&\text { Understated } & \text { Overstated } \
D.&\text { Understated } & \text { Understated }
\end{array}$

Quizplus · Accepted Answer

Under IFRS, research costs are expensed as incurred, which reduces net income in the current period, making it understated if considering the potential future benefits of the research. In five years, when the drug is being sold, the lack of capitalized research costs (since they were expensed) means there is no amortization reducing net income, potentially making it overstated compared to if the costs had been capitalized and amortized over the useful life of the drug.

Pharma-Mart Is Currently Undertaking Research in Hopes of Developing a Drug