Gamesa reports under International Financial Reporting Standards, which require research and development to be expensed, except in the case of late- stage development costs after technological feasibility has been demonstrated During Year 2, Gamesa will incur 245 in research and development costs (all paid in cash) of which 50 will satisfy the criteria to be recognized as an Capitalized Development Cost intangible asset. (3 points)

During Year 2, Gamesa's financial reporting means they will expense a total of 195 (245 total R&D costs minus 50 capitalized development costs) as regular expenses. This impacts their income statement by reducing net income, but the 50 capitalized costs will be recorded as an intangible asset on the balance sheet, potentially affecting future earnings when amortized or when the asset contributes to revenue. Understanding the treatment of R&D costs can significantly affect a company's financial position and valuation. Investors should keep an eye on how much of the R&D expenses are being capitalized versus expensed, as capitalized costs may lead to future profits stemming from new technologies or products that Gamesa develops.