- Research and development expenditures
- Fixed assets
- Inventory valuation
- Leases
- Pensions
- Accounting for income taxes
- Foreign currency translation
- Accounting for mergers and acquisitions (including goodwill)
- Consolidation
- Impairment
- Transfer of financial assets and special purpose vehicles
- Derivatives
This chapter is not intended to provide a comprehensive analysis of differences in
accounting standards but, rather, a decision framework.
(a) Research and Development Expenditures. The first issue we will discuss is the
accounting treatment for R&D expenditures. Though the definitions vary from coun-
try to country, “research” is generally thought of as the planned efforts of a company
to discover new information that will help create a new product, service, process, or
technique, or will improve one that is already in use. “Development” takes the find-
ings generated by research and formulates a plan or design for the production of a
new product or to improve an existing one substantially. The costs incurred during
each accounting period by a company on R&D activities are generally thought to be
a discretionary expenditure, which will not translate into significant revenue genera-
tion or expense reduction in that period, and may or may not result in future revenue
generation. Rule makers in each country, and at the IASB, have been called upon to
establish a policy governing the accounting for R&D costs.
The two basic ways to account for R&D are capitalizing the costs or expensing
them when they have been incurred. Those who support immediate expense recogni-
tion argue that there is a great deal of uncertainty as to whether the R&D will bene-
fit future periods. To expense the costs is conservative, since income will be lower in
the current year than if the cost is amortized over future years. Several countries’
standards (including those of Germany and the United States) require immediate ex-
pense recognition under all circumstances.
However, the more popular approach is to allow capitalization under specified cir-
cumstances. Those who support this approach believe that, if it can be determined
that there is a strong chance that the new product will be successful, capitalization
provides a better matching of future revenue and expense. By allowing capitalization,
companies are encouraged to spend money now for the future, without worrying
about the impact on their current reported income. Canada, France, the Netherlands,
Switzerland, the United Kingdom, and IAS all allow capitalization under certain cir-
cumstances. Each of the countries’ criteria for capitalization focus primarily on
whether the technical feasibility of a product or process has been established com-
bined with a judgmental assessment of the economic likelihood of product success.
Some countries take the approach that research costs should be expensed, while
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