Research expenses, notwithstanding the uncertainty about
futurebenefits,shouldbecapitalized.Tocapitalizeandvalue
researchassets,we makean assumptionabouthowlong it
takes for research and development to be converted, on
average, into commercial products. This is called the
amortizable life of theseassets. This life willvary across
firms and reflect the difficulties associated with
commercializing research. To illustrate, research and
developmentexpenses ata pharmaceuticalcompany should
havefairlylongamortizablelives,sincetheapprovalprocess
for new drugs is long. In contrast, R&D expenses at a
softwarefirm,whereproductstendtoemergefromresearch
much more quickly should be amortized over a shorter period.
Once the amortizable life of research and development
expenseshasbeenestimated,thenextstepistocollectdata
on R&D expenses over past years ranging back to the
amortizablelifeoftheresearchasset. Thus,if theresearch
assethasanamortizablelifeoffiveyears,theR&Dexpenses
ineachofthefiveyearspriortothecurrentonehavetobe
obtained. For simplicity, it can be assumed that the
amortization is uniform over time, which leads to the
followingestimateoftheresidualvalueoftheresearchasset
today.
Thus,inthecaseoftheresearchassetwithafive-yearlife,we
cumulateone-fifthoftheR&Dexpensesfromfouryearsago,
two-fifths of the R&D expenses from three years ago,
three-fifths of the R&D expenses from two years ago,
four-fifths of the R&D expenses from last year, and this