Research and development term is mainly used for covering the huge range of activities that undergoes within a company and offers different types of services. It implies that it might hold different characteristics, which are usually indistinctive to each other. The UK GAAP SSAP 13 provides the guidelines about accounting policies, which could be considered in the case of research and development expenditure. All these policies are expected to stick with the basic accounting concepts, which includes prudence concepts and accruals methodology. However, the UK GAAP SSAP 13 Accounting used for research and development explores and differentiate activities that come with the recognition of R&D activities, such as applied research, pure research along with development (Ho, Tjahjapranata & Yap, 2006).

The two accounting standards of R&D are variant and offer appropriate guidelines about their standards. SSAP 13 mentions that expenditures related with applied and pure research need to be written off in accounts of profit and loss; unless it became part of fixed assets, then, in that case, it could be amortized or capitalized based on useful life.

In the context of expenditures done on developments, UK GAAP expects that the organizations invest in all these activities with fewer expectations about particular future economic advantages and commercial success that arise through the work. If this criterion is fulfilled, then, in that case, it will be permissible to defer all these expenses to the limit that it could be assured and match with future revenue. Therefore, companies, which follow the SSAP 13 either hold the choice to capitalize all these development costs, where the business can fulfil the criteria or either they could allocate them as expenditure. When the point comes of development cost recognition SSAP 13 as well as IAS 38 are quite similar to a method (IAS 38: Intangible assets, 2004).

IAS 38 apply the following standards in the context of recognized products. It could be purchased as self-created products; it should be probable that the upcoming economic advantages of assets will move to the entity, and the asset cost could be reliably measured. In the case of expenditure done over development, the used asset sale should be set up for the purpose of capitalizing the expenses. Therefore, the organizations are expected to intend with the sell and use of intangible assets and should demonstrate how the items will help in generating future economic advantages for the company (Kafouros, 2005). In the context of research associated expenses, it is quite simple, as all the expenditures related to research activities should be charged. On the other side, IFRS fails to permit the research capitalization associated with expenses. Below is the table that depicts the summary of two important accounting treatments for R&D.

UK GAAP (SSAP 13) and International Accounting Standards (IAS 38)

Terms

UK GAAP SSAP 13

International IAS 38

Cost of research

Expense

Expense

Cost of development

It includes firm’s discretionary policy. If the company fulfill the criteria of recognition, then the company can select among expense or capitalization.

It should capitalize if criteria are fulfilled (depicts future advantage of developed asset)

 

 

 

Example

R&D expenditure

The expenses did by the firm to develop the new item, like developing new computer software. It is evident that traditional perspective that relates to assets, often include assets that had physical substance. For instance, the firm expands and construct the new factory. The plant cost will be identifiable, and there will be less argument over capitalization. The new asset will be factory building, which will provide benefit to the company in near future accounting. The issue occurs when firm spend for collecting future economic benefit on physical asset, instead of an intangible asset. This problem is discussed below:

A software company manufactures and sell the products. The profit statement is given below:

Now the company develops new software. The software engineer’s team will be hired to write and develop new software so that product is completed at starting stage, and all resources are used to make sure about expeditious completion. From total cost, around £150000 of salaries and £90000 of direct overhead is linked with new product development. The cost associated with developing a previous product of company will be £50000 for wages and £10000 for direct overheads.

While information on cost depicts expenses and revenue, figures fail in representing actual reality of the situation.

The company develops a new product, and its principles will be same as other assets, which produce future economic advantages. The only variation is that asset has no physical substance. Unless few adjustments are made with figures, it will look that there is no asset.

However, the asset definition relates to constituent parts; it will look that asset could develop expenditure for the company. That is:

-          Product will bring future advantage

-          Product is controlled by company

 

 

References

Ho, Y. K., Tjahjapranata, M., & Yap, C. M. (2006). Size, leverage, concentration, and R&D investment in generating growth opportunities. The Journal of Business, 79(2), 851-876.

IAS 38: Intangible assets. (2004). International Accounting Standards. IAS, 1587.

Kafouros, M. I. (2005). R&D and productivity growth: Evidence from the UK. Economics of Innovation and New Technology, 14(6), 479-497.

GET A PRICE
£ 10 .00