Research and development (hereafter, R&D) is the main concern of interests as we have been asked by the Ruritanian Accounting Standards Board (RASB) for advice on their proposed accounting standard for R&D. Therefore, in the first section we will provide a general definition, overview of R&D and identify and explain the principal problems relating to R&D that should be addressed by RASB. In the second section, we will identify and explain the appropriate accounting concepts that should be applied in dealing with the problems and issues relating to R&D. Finally, in the third section, we will apply these accounting concepts to provide advice and recommendations to the RASB on its proposed accounting standard for R&D.
The standard setters in many countries have distinguished and separated the definition of research from development in their accounting standards. For instance, in the UK, the Standard Statement of Accounting Practice (SSAP) 13, classified R&D expenditure into 1) pure research as an experimental/theoretical research to gain new knowledge, 2) applied research as an original or critical investigation to acquire new knowledge for entities\u2019 own purposes and for a direct objective and 3) developments activities as the use of scientific or technical knowledge to produce or improve new products and services. On the international level, the International Accounting Standard Board (IASB) defines research as \u201cthe original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and
understanding.\u201d Development, on the other hand, is \u201cthe application of research findings or other knowledge into a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or use.\u201d (Khadaroo and Shaikh, 2003).
R&D is a major element of sustainable innovation-led growth as it involves creating new products or helps to increase the value added products and improve services on which the future of any company increasingly depends1. In this context, the Business Accounting Deliberation Council, hereafter BADC, (1998) argued that the R&D activities are very important activities for the current and future companies\u2019 profits, as the current business product life cycle has become shorter, and the need for new technology to catch-up with these conditions is increasing. Thus the need for R&D activities is growing rapidly and the expenditures on these activities have reached to significant amounts and become more challenging and important in the business world (BADC, 1998). In academia, Zhao (2002) argued that R&D costs were a fast growing phenomenon in accounting research and for standards setters during recent years, as a result of the increasing significance of intellectual property rights. Furthermore, the information relating to the total amounts of R&D costs and the details of these activities have become increasingly an important source for investors' decision making in understanding the company's management policies and future profitability (BADC, 1998). Therefore, the need for accounting treatments and regulations for R&D costs are an important concern to accounting jurisdiction around the world. However, there are several principal problems relating to R&D that have been addressed in the accounting literature and need to be considered in the contexts.
The first principal problem is the discussion focusing on whether the costs incurred by R&D should be capitalised as assets or written off as an expense. The fundamental issue herein is related to asset recognition and criteria thereof. An asset is defined as \u201crights or other access to future economic benefits controlled by an entity as a result of past transactions or event\u201d (Statement of Principles, Accounting Standards Board). What has to be ascertained is whether assets will result from R&D activities. Standard setters approached this issue in different ways, for instance UK and IAS GAAP require all research costs and most development costs to be expensed immediately as they were incurred in the current accounting period. Except for some portions of development cost those have a clear defined project of commercial value to which those costs can be reasonably matched against their related future economic benefits; then, these portions of development costs incurred are allowed to capitalise. For US GAAP, on the other hand, the standard setters apply even more conservative approach which requires for all R&D costs to be written off as expenses.
Related to this discussion, a further principal problem faced by many accounting setters and jurisdiction around the world is the main debate between the advocates of the accrual principle and the advocates of the conservatism principle in the accounting treatment of R&D costs at the time of recognition. The former suggests that the costs incurred by R&D activities must be matched against the future economic benefits that can be derived from the new products or processes developed or new services rendered. The latter suggests that as future benefits cannot be ascertained with reasonable certainty, the costs incurred by R&D activities must be immediately expensed as incurred (Khadaroo and Shaikh, 2003). For example, much attention has been given to the treatment of R&D costs in the oil and gas industry (Dopuch and Sunder, 1980).
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