Question

Companies engage in research and development (R&D) in order to develop new products, processes, and/or ideas that may provide future value.



Under U.S. GAAP, all R&D costs are expensed in the year incurred (no asset recorded). For example, if a company spent $1,000,000 cash on R&D in 2017, U.S. GAAP would require the following journal entry:



R&D Expense 1,000,000

Cash 1,000,000



Thus, the $1,000,000 expenditure would result in a $1,000,000 (pre-tax) reduction in income for 2017.



Under IFRS, research costs are expensed (similar to U.S. GAAP). However, development costs are capitalized (recorded as an asset) once “economic viability” is achieved. In essence, economic viability indicates that the project is far enough along in the process such that

economic benefits of the R&D project are expected to flow to the company. Therefore, under IFRS, development costs incurred after economic viability is reached meet the definition of an asset. For example, if a company spent $500,000 cash on research and $500,000 cash on developing a project with “economic viability,” IFRS would require the following journal entry:



Research Expense 500,000

Asset 500,000

Cash 1,000,000



Provide your opinion as to whether U.S. GAAP or IFRS produces more “decision-useful” information related to R&D expenditures.



Choose: U.S. GAAP or IFRS



Justify your answer to part “a.” Specifically, how does the methodology you choose (U.S. GAAP or IFRS) affect the relevance and faithful representation of this information (i.e., the two fundamental qualities of accounting information). Does it improve both qualities, improve just one, or potentially even improve one while harming the other?

Answer 1

In my opinion, based on the study of IAS 38 and ASC 730, US GAAP ASC 730 provides more “decision-useful” information related to R&D expenditures primarily for following reasons:

1. Research costs are expenses both in IAS 38 as well as ASC 730, but not development. Development costs are to be identified and amortized over the period. There is a practical difficulty in addressing when to separate development cost from research cost.

2. It is also unclear regarding analyzing whether and when the criteria for capitalizing development expenditures are met.

There are two qualities of accounting information, relevance, and faithful. While information under IFRS can be more relevant as to different treatments of research and development, it is likely that owing to the complications involved in segregating research and development the information in the accounting is less faithful.