Research and Development Costs Standards

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

Table of Contents

Overview of the two standards
Comparison of the standards
Analysis of the case
References

Overview of the two standards

The paper seeks to discuss extensively the treatment of research and development costs. A review of the U.S. GAAP and IFRS shows that there is a slight difference in how this cost should be treated in the financial statements. According to the U.S. GAAP (SFAS No. 2), the costs for research and development (R&D) should generally be expensed (Jarnagin, 2008). This guideline is based on the fact that the future streams of benefits that are associated with R&D expenditure are uncertain. This makes it difficult to treat the amount spent on research and development as expenses. However, under IFRS (IAS 38. 54 and 57), all research costs are expensed. On development costs, the standard recommends that development costs should be capitalized only after the technical and profit-making viability of the asset for sale or use has been ascertained (Nikolai, Bazley & Jones, 2009). This implies that a company must intend and complete the intangible asset. The company should be able to estimate the cost of the asset. Also, the company intends to use or sell the asset. Also, it is important to show that the asset will create future monetary benefits. Further, the research phase and development phase should be distinctively separated. Otherwise, all the R&D costs will be expensed. Therefore, IAS 38 gives room for capitalizing R&D costs. Capitalization of the development costs should be done only if all the criteria are met. If any of these criteria are not met, then all R&D costs should be expensed (Stice & Stice, 2013).

Comparison of the standards

A review of the two standards shows that they both concur on the treatment of research expenses. However, there is a divergence on the treatment of development costs except for the development of software. The basic rule of expensing all development costs is not completely all-encompassing. There are some exceptions to this rule. For instance, if some assets or materials have been acquired and have another use in the future, then they should be capitalized. Such exceptions limit the ability to entirely follow the guidelines provided under U.S. GAAP (Oswald, 2008).

Analysis of the case

In the case of Thomas Company, there is a clear distinction between the research and the development phase. As seen in the discussion above, the two sets of accounting standards agree that all expenditure that is incurred during the research phase should be expensed. All expenses that are incurred during this phase will be expensed. From the case study, the costs that will be expensed are design and engineering studies, prototype and manufacturing costs, administrative costs that relate to R&D, and the cost of the equipment that amounts to $200,000. The balance of $300,000 should be capitalized because it meets the criteria for capitalization that are listed under IFRS. This will make it consistent with the matching principles. The value will appear under assets on the statement of financial position. Besides, depreciation expenses for this amount will be expensed. It will appear as research and development expense for the year (Wahlen, Jones & Pagach, 2012). There are some expenses in the case study that do not relate to research and development. These are market research costs and salaries of administrative expenses. These costs will be expensed directly in the income statement because they are period costs (Lev & Sougiannis, 1996). In summary, the discussion above shows that there should be selective use of U.S. GAAP when accounting for research and development costs. Besides, there is a need to harmonize these two standards to create uniformity in reporting the financial performance of a company.

References

Jarnagin, B. (2008). U.S. master GAAP guide. Washington, D.C: CCH Publishers.

Lev, B., & Sougiannis, T. (1996). The capitalization, amortization, and value-relevance of R&D. Journal of Accounting and Economics, 21(1), pp. 107-138.

Nikolai, L., Bazley, J., & Jones, J. (2009). Intermediate accounting (book only). Boston, MA: Cengage learning.

Oswald, D. (2008). The determinants and value relevance of the choice of accounting for research and development expenditures in the United Kingdom. Journal of Business Finance & Accounting, 35(1-2), pp. 1-24.

Stice, E., & Stice, J. (2013). Intermediate accounting. Boston, MA: Cengage learning.

Wahlen, J., Jones, J., & Pagach, D. (2012). Intermediate accounting: reporting and analysis. Boston, MA: Cengage learning.

Click Here To Order Now!

Research and Development Costs Standards

Do you need this or any other assignment done for you from scratch?

We have qualified writers to help you.

We assure you a quality paper that is 100% free from plagiarism and AI.

You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)