The accounting treatment
Accounting treatment is the most important component element of any accounting standards since which directly interprets the conceptual framework of accounting standards to accounting practice and provides specification and guidance for accountants. The different treatments among different standards led to several debates which extremely influence the accounting practice and convergence of accounting standard and those arguments also fierce in research and development dimension. More precisely, the key point of contention is whether to expense R&D costs or capitalize them. The all three wide utilized standards including SSAP 13, FAS 2 and IAS 38 have their own and distinct treatments. There is a consensus in SSAP 13 and IAS 38 that those two standards require recognizing research costs as expense when incurred, meanwhile, they have a similarity that allows companies to capitalize the incurred development costs as a part of assets under certain conditions. However, the criteria which capitalization needs to satisfy are different between these two standards. Furthermore, SSAP 13 allows companies to choose if capitalize or expense costs even criteria are met. On the other hand, all costs should be capitalized compulsorily if they meet all the criteria. By contrast, the treatments of R&D under FAS 2 are totally different from others. Specifically, there is no need to distinguish research and development costs under FAS 2 since all the costs (except certain website and software development cost) required to be expense as incurred immediately, therefore, capitalization is not exist in this standard. It is obvious that problem emerged because of such different treatments. Some people argued that the identification of R&D in IAS 38 needs a considerable judgment because the criteria for capitalize costs are too flexible and some vague words in standard might provide opportunities for creating accounting. Others doubt that the conservative approach from FAS 2 ignores the relationship between costs and revenue and such irrelevance might affect the truth of financial performance. Those debates brought problems which need to be concerned and addressed in development of our standard.
By reviewing the different approaches and considering the existed problems in R&D accounting treatments and for satisfying the consistency with basic accounting concepts under RASB, some recommendations are be brought as following:
- recognizes research and development costs as a whole rather than separates these into two aspects.
- classify companies to three types by identifying the proportion of research and development activities in companies, and then adopt different treatments for each type of companies.
R&D Dominant Company: If research and development activities are the dominant activities in companies, i.e. the R&D activities are the daily activities. All the costs of R&D should be capitalized when incurred.
High Proportion of R&D Company: those companies not only focus on R&D activities but which also account for a large proportion of companies activities. The costs for a R&D project should be expensed as expenditures at the beginning, but those expenditures can be capitalized later if such project completed. Otherwise, costs remain as expenditures.
Normal Company: Other companies which not satisfy the condition above should expense their R&D costs as incurred and write off immediately.
It is reasonable for this accounting treatment in many aspects. Firstly, it complies with the definition of R&D under RASB which identifies research and development activities as a whole, therefore, it avoid the unnecessary classification and simplify the process of accounting practice. Secondly, it reflects the prudence concept by expensing R&D costs of normal companies. R&D is not the prime activity in these companies, therefore, they generally are not to be expert in R&D area and the results are difficult to predict. Expensing can be a conservative approach which appropriate for these companies. Thirdly, it emphases the materiality concept by selecting another treatment for R&D dominated companies. R&D is the most important; even the only activity in these companies and capitalization would be a better choice than expense its R&D costs blindly because it avoids ignoring the essence of this kind of companies.
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