In 1974, the FASB considered requiring the expensing of all in-house research and development (R&D) expenditures. The Board received many comments predicting that if firms were required to expense R&D, they would significantly cut back on research expenditures to avoid hurting reported earnings. Subsequent to the adoption of pre- Codification FASB Statement No. 2, such an impact proved to be difficult to document.
What are the pros and cons of expensing R&D and what effect would such policy have on current and future expenditures? Why does the accounting profession make a distinction between internally created intangibles and purchased intangibles? How are these intangibles accounted?
The discussion focuses on whether to expense or capitalize all internally generated research and development (R&D) expenditures. This was a 1974 consideration by FASB, which garnered many comments from stakeholders basically against the said consideration of FASB. Some of the comments pointed out that the move would lead to a decrease interest in R&D.
You are to address the following in your initial post:
- Pros and cons of expensing R&D
- Impact of the move on current and future expenditures.
- A distinction between internally generated and purchased intangibles.
- Accounting for these intangibles
As we focus on fixed assets and intangibles this week, please follow the two links to YouTube videos that present an overview on R&D and the difference between expensing and capitalizing R&D expense. Please use: “Ctrl+Click” to access the videos.
This part should be a short essay with at least one source APA, with at least 10 sentences.
Then, respond to two of your classmates’ postings in any of the following ways:
- Build on something your classmate said
- Explain why and how you see things differently
- Share an insight from having read your classmate’s posting
- Offer and support an opinion
- Expand on your classmate’s posting
The pros of expensing R&D include that businesses can deduct 20% of the expense from taxes and can be taken as a lump-sum or over the course of 5 to 10 years. One of the main disadvantages of expensing it would be that the Company couldn’t consider it an asset, like other intangible assets. It would be difficult to measure the future economic benefits of the costs (Merritt, 2018). Depreciation of the “asset” would also be difficult to calculate based on uncertainties. However, if a Company acquires another company, the Company can capitalize the “in process” R&D projects of the acquired company. If tangible assets result from the project, the assets have to be assigned a life-span in which to amortize.
Merritt, Cam. (2018). Why Are R&D Expenses Not Capitalized. Chron. Retrieved from: https://smallbusiness.chron.com/rd-expenses-not-ca…
The benefits and disadvantages of expensing research and development (R&D) can include a negative impact in Net Income, operating cash flows will be decreased, assets will be decreased, and ratios such as efficiency will be decreased. Expensing R&D will have highest costs showing the first year or two due to initial startup and large sums put into asset purchases. Later years will see decreased spending and possible returns from the developed products or services.
Internally created intangible assets are accounted for differently than purchased intangibles, mostly due to the purchased intangible having a known value and can be accounted for at each period. Whereas internally created, the values are unknown until sold or placed on the market and the number of years assigned is determined.
Wild, J. J., Shaw, K. W., & Chiappetta, B. (2017). Fundamental accounting principles. New York, NY, NY: McGraw-Hill Education.
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting & analysis (2nd edition). Cengage Learning.
This part should be a paragraph with at least 7 sentences for each respond.