Every organization measures their financial as well as the operational performance by making necessary accounts mainly includes a statement of comprehensive income, statement of financial position and statement of cash flow. In order to maintain the record of all the monetary transactions, companies are required to follow several accounting principles, concepts, and standards. Global companies have to follow international or globalized standards such as IAS and IFRS to record each and every item in annual accounts, however, a domestic entrepreneur may follow domestic standards that are Generally Accepted Accounting Principles. The rules and regulations for reporting transactions as per both the standards differ from each other. SSAP 13 superseded by FRS 102 prescribed accounting policies and principles in relation to research and development expenditures wheres at international level; IAS 38 is applied to the intangible assets covers R&D cost as well. This report will present a critical evaluation of R&D treatment under both the SSAP 13 and IAS 38.
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According to Council (2013), SSAP 13 categorized R&D cost into three elements that are pure research, applied research and development. Its recognizing criteria for both the pure and applied research is that it must be disclosed in profit and loss account and written off from the business yield. However, development cost should be recorded as an expenditures in the year when it incurred unless five specific recognition criteria do not meet, whereas if such cost met all the criteria then these development expenditure should be deferred by the way of capitalizing in balance sheet as an intangible asset and amortize it over the specified duration over which it is expected to recover reasonable return. However, on the contrary to this, as per the viewpoint of Choi (2011), IAS 38 stated that cost of research must be disclosed as an expense because it is not easy for the companies to identify reasonable return in the future period. On the contrary to this, expenditures incurred on development must be capitalized by reporting as intangible assets in SOFP and then must be amortized by meeting all the stringent recognition criteria.
Thus, as per Wild, Creighton and Simmonds (2015), the key difference between both the domestic GAAP principle foreign standard, is that SSAP 13 treat both the research and development cost as an expense, until and unless expenditures incurred on development met strict criteria. The criteria of recognition include that future benefits are the identifiable, commercially viable and technically feasible project, expected revenue outweighed total cost and incurred development expenses can be identified separately. If these following criteria are fulfilled, then it gives the option to either capitalize or write off against profit and loss account. In case, when an entity wishes to capitalize it then incurred expenditures will be reported as intangible assets by bringing it on the balance sheet. On the contrary to this, if the company just wants to write off the money paid then it will be liable to follow that accounting principle consistently for all the developments projects that meet all the criteria. On the other side, such expenditures which are capitalized will be amortized only after when production begins.
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Furthermore, International Accounting Standards Board. (2004), presented that companies are accountable to review their capitalized development project at the end of every accounting year to make sure that criteria are still met. In case, if all the strict conditions are not fulfilled or seem doubtful than firms have to write off their capitalized cost in SOCI urgently. However, on the critical note, Cheung, Evans and Wright (2008), criticized SSAP 13 on the basis that it offer choice to the companies for either capitalizing their development cost or not which bring problems due to inconsistencies in the reporting structure.
According to Wittsiepe (2008), a key difference between domestic and internationalize accounting principle is that SSAP 13 have separate policies and standard in connection with R&D, whereas, there is no separate global standard exists for such costs and IAS 38, Accounting for intangible assets is applied on R&D. As per Choi (2011), IAS 38 set a straightforward recognition criteria for internally generated intangible assets that are probable benefits will bring revenue to the entity and incurred cost can be measured reliably. Although the criteria look very clear, but still, in the real business scenario and corporate field, it seems very tough for the enterprises to identify that whether incurred R&D cost meet the following criteria or not. In order to eliminate such difficulty, this standard presented a more clear set criteria by segregating both the cost into two phases that are research and development phases. IAS 38 prescribed that it is impossible for the company to clearly judge that whether a product or service will bring future economic benefit to it or not, as a result, such cost never should be capitalized and disclosed or write off as expenditure in the year when they incurred. On the contrary to this, as per the view point of Roy (2013), to capitalize development cost some strict policies and recognition criteria must be meet out. It encompasses technical feasibility of the project, intention or desire to complete or sell, firm ability to utilize or sell, market existence for the assets, enough resources available to complete the project and reliable measure of the cost. If all the situation fulfilled, than cost must be capitalized and carry forward as intangible assets, however, in case of any circumstances, if criteria do not meet than incurred cost must be charged to profitability statement rather than capitalizing it. Similar to SSAP 13, at the end of every accounting year, companies have to review that capitalized expenditures are still met the set criteria or not, if not than it should be treated as expenditures.
Suppose, a firm paid 200000 GBP on research and 600000 GBP on development than as per SSAP principle, 200000 will be treated as expenditure, and 600000 can be either capitalized in SOFP or expensed in P&L account. Similar to this, IAS 38 also treat 200000 as expenditure, but still, if 6000000 GBP met all the defined criteria then must be capitalized and amortized, if not then it will be treated as similar to the research cost.
Report concluded that SSAP 13 delivers choice to the companies to either capitalize or not capitalize their development expenditures. Whereas, IAS 38 imposes mandatory liability to the companies that if conditions fulfil than development cost needs to be capitalized, otherwise, it must be shown as expenditures in income statement.
- Cheung, E., Evans, E. & Wright, S. (2008). The adoption of IFRS in Australia: The case of AASB 138 (IAS 38) Intangible Assets. Australian Accounting Review.
- Council, F. F. R. (2013). SSAP 13: accounting for research and development.
- International Accounting Standards Board. (2004). International accounting standards IAS 36, Impairment of Assets, and IAS 38. Intangible assets. IASCF Publications Dept.
- Wild, K., Creighton, B. and Simmonds, A. (2015). GAAP 2000: UK Financial Reporting. Springer.
- Wittsiepe, R. (2008). IAS 38—Intangible Assets. IFRS for Small and Medium-Sized Enterprises: Structuring the Transition Process.