m Should the recognition of research and

development expenditure in financial statements

be seen as less important than disclosure?
m Does International Accounting Standard 38, in
removing discretion over the treatment of
development expenditures, remove a useful way
for firms to communicate information to the stock
markets?
m Definition of Research and Development.
m Brief history of the treatment of Research and
Development.
m OD 14
m OD17
m SSAP 13
m rbtaining new knowledge

m Search for alternatives for ± materials, products,

processes.
m IAS 38

m Research expenditure should be expensed in the year in the SCI in the

year which incurred

m Development costs are capitalised only after the technical and

commercial feasibility of the asset for sale or use have been
established.

m If unable to distinguish between the two, must treat as research.

m The amount of research and development expenditure recognised as

an expense in the current period must be disclosed
m Disclosure is necessary in order that stock
markets can put appropriate values on firms¶
R&D activities.

m Provides a µreality check¶ on claims from

management.

m Required to assess revenue projections ad

dependence on activities.
m Disclosure is needed as it is an important
indication of a company's future prospects.

m Disclosure can strengthen the confidence of

investors.
IXr (1997)
³disclosure of information is the key factor in
determining the value the capital markets attribute
to a company's R&D expenditure rather than its
treatment´
m ³need for a safeguard with respect to voluntary
disclosures to ensure such disclosures can be
relied upon´
Skinner 2008
 (IASB¶s Recognition of an asset:
³Recognised in the SFP when it is
probable that future economic benefits will
flow to the entity and the asset has a cost
or value that can be measured reliably.´
(Definition of R&D
m ßalue relevance of R&D- Green et al 1996/ Akbar
and Stark 2003/ rswald 2008
m Raising finance
m Wyatt- Regulators might do better if more
discretion were given to managers to recognise
intangible assets.
m ³Some of the professional firms responding
supported this latter view on the grounds of the
matching principle.´
m Ëope and Gray 1982:
³anything other than extensive disclosure of individual
project expenditures and estimated success rates of
projects would be misleading to users of accounts.´
m Definition
m Comparability
m Materiality
m Advantage to competitors
m Confidentiality
m Regulation: Penman 2006/ Skinner 2008
m Òndervaluation of intangible assets?

m Appears to be little demand for a widespread

reappraisal of accounting policy at present.

m Guidelines already exist, further guidelines would have

to consider the already existing ones.

m Oxtra costs involved in developing guidelines.

m Difficulties in defining definitions clearly.

Does International Accounting Standard 38, in
removing discretion over the treatment of
development expenditures, remove a useful way
for firms to communicate information to the stock
markets ?
m Development is the application of research
findings or other knowledge to plan or design
the production of new or substantially
improved materials, devices, products,
processes, systems or services prior to the
commencement of commercial production or
use.
m Prudence v Accruals
m Oxposure Draft 14 (1975) - Immediate expensing of
all expenditures.
m OD 17 (1976) - Immediate expensing of all research
expenditure and mandatory capitalisation of
development expenditures which satisfy certain
criteria.
m SSAP 13 (1977) - Immediate expensing of all
research expenditure with optional capitalisation of
development expenditure which satisfy certain
criteria .
m SSAP 13 Revision (1989) - revised to recommend
the disclosure of R&D expenditures, for firms meeting
certain size thresholds.
m The main internally generated intangible
considered is development costs.
m If the enterprise is unable to distinguish between
research and development phases, then the
entire expenditure must be recorded as
research phase expense.
m An intangible asset arising from development is
recognised only if the specified criteria are met.
m If expenditure passes the ³development´ test, it
must be capitalised.
1. The technical feasibility of completing the intangible asset so that
it will be available for use or sale.
2. It¶s intention to complete the intangible asset and use or sell it.
3. It¶s ability to use or sell the intangible asset.
4. Ëow the intangible asset will generate probable future economic
benefits.
5. The availability of technical, financial and other resources to
complete the development and to use or sell the intangible asset.
6. Its ability to measure the expenditure attributable to the intangible
asset during its development reliably.
m Revised SSAP 13 allowed firms the discretion,
but not the compulsion, to capitalise
development expenditures under certain
conditions.
m Footnote disclosure was then available about
the extent of capitalisation of development
expenditures.
m rswald (2008) studies how the choice of
capitalising versus expensing is associated with
the value-relevance of book value and earnings.
m rswald¶s results suggest that firms exercise of
discretion over the accounting treatment of
development expenditures are consistent with
the notion that firms acted to increase the value
relevance of earnings and book value.
m This supports the theory that the IAS, in
removing discretion over the treatment of
development expenditures, remove a useful way
for firms to communicate information to the stock
markets.
m ixon (1997) - argues that one reason why many Ò
firms did not use the discretion allowed to capitalise
and amortise some of their qualifying development
expenditures is that to so do requires a reasonably
substantial amount of work.
m rswald looked at 3229 firms ( between 1996 ± 2004),
of these 14.5% were capitaliser firms. As a
consequence, discretion might not have too drastic an
effect on the Ò stock market
m Market values could and should be explained by more
than just the informational variables of book value and
earnings.
m Skinner (2008)
m As a result of rswald¶s findings, we may want to
know more about the impact of discretion on the
information content of the entirety of the affected
disclosures.
m Penman 2006 ± for firms in a steady state, the
capitalise versus immediate expensing issue is
not automatically of any concern to market
participant valuing the firm. For such firms, the
accounting treatment of these expenditures does
not mislead market participants into serious
forecasting mistakes with respect to the future
potential of firms.
1. Capitalising v expensing could be an issue for
non steady state firms.
2. There may be a need to separately disclose
expenditures on items likely to give rise to
intangible assets.
3. Whether there are sufficient safeguards in
place with respect to voluntary disclosure to
ensure that such disclosures can be relied
upon.
m Skinner (2008) - For research and development,
however, it seems accepted in the Ò that
voluntary disclosure outside of financial
statements, in addition to the disclosure of
research and development expenditures, is
necessary in order that stock markets can put
appropriate values on a firms¶ research and
development activities.
m There could be a role for voluntary disclosure
guidelines.