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Accounting for Research and Development in Ruritania
The objective of this report is to prescribe a conceptual basis for Research and Development costs in Ruritania. After having exposed the main problems raised by the accounting of R&D, we will examine those issues in the light of appropriate accounting concepts, and then express our recommendations for the RASB.
I) Problems relating to accounting for Research and Development:
a) A fundamental problem of definition:
Some accounting standards such as IAS 9 tend to define R&D by distinguishing Research and Development, and provide a list of included and excluded R&D activities. Other standards, such as the SSAP13, distinguish Pure Research from Applied Research and Development with an industry-specific orientation. This difference points to the fact that there is no universal definition for “Research” and “Development”. ... This point stresses the importance to define clearly “Research” and “Development” within the RASB standards. ... At its development stage, an R&D project is more advanced and the chances of success appear to be more predictable, as well as the potential future profits, than during the stages of Applied Research and Pure Research.
This lack of relation between R&D and future economic benefits is at the core of the primary problem concerning R&D accounting. ... This method corresponds to decision-making accounting, since it is consistent with decision making models such as the NPV value decision model. ...
This question of recognition of R&D costs lies at the heart of R&D accounting. ...
d) The non-harmonization of general R&D accounting practices:
Concerning the accounting practices of R&D costs discussed in c), the accounting standards around the world differ from one country to another. While the International Accounting Standard Board (IAS9) and the British Accounting Standard Board (SSAP 13) allow conditional capitalization of R&D costs, the American Financial Accounting Standard Board (FAS2) requires the full and immediate expensing of all R&D costs.
This accounting difference in the world is problematic. ...
Little can be achieved by a developing country like Ruritania to harmonize the Accounting practices in the world. ...
II) Discussion of the problems relating to R&D Accounting and recommendations for the RASB:
In this part, we will discuss the fundamental point pending in Ic), to determine which accounting method should be applied to R&D in Ruritania. We will base our advice on relevant accounting concepts. From this fundamental choice of accounting policy, we will establish our main recommendations for RASB.
Approximate Word count = 2049
Approximate Pages = 8.2
(250 words per page double spaced)
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