Accounting for Development Costs at FCA and VW Questions

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1. Before getting into the accounting issues in the case, work to develop an understanding of the business similarities and differences between FCA and VW. How are the two companies’ business models similar, and how are they different?
2. Compare FCA’s and VW’s accounting for development costs in 2019:
   a) Conceptually, how does the accounting for R&D work at FCA and at VW?
   b) How much did each company spend on R&D?
   c) What proportion of R&D outlays did each capitalize? (Is this ‘c’ or #3)
3. Why might FCA and VW use different assumptions to capitalize and amortize their development costs? As an investor how would you interpret the differences? Why?
4. Would you recommend that the FASB change the reporting of development costs in the U.S. to require (or allow) companies to capitalize some share of development costs? Why or why not? Would your views differ if you were an auto executive or an investor?

Below are additional questions (no downside if not included in the assignment submission) that may be discussed in class. Feel free to add responses to these questions in your assignment – there is no downside in not doing so.

5. Given the amortization expense, what was the average life of the beginning gross carrying value of capitalized development costs?

6. Assume that in 2019 FCA changed its assumptions to match those of VW. How much of its R&D outlays would have been expensed immediately? What would have been its amortization expense (based on the beginning gross carrying value of capitalized development costs)? Are these effects significant?