Question

As we learn in chapter 9, GAAP requires that research and development (R&D) costs be treated as period expenses, prohibiting their capitalization. Because of this, when a company has an internally developed intangible asset, it does not show any value for it on its balance sheet. Only purchased intangibles, having a more identifiable value (cost) are carried as assets on balance sheets.

Many in the accounting field and in business in general believe that this rule should be changed. These critics argue that it is possible to derive the cost of internally developed intangibles accurately and that the current rule is just unfair since it forces companies to leave off their balance sheets a right that will yield benefits over multiple future periods.

For this DB, take a position for or against allowing companies to capitalize the cost internally developed intangibles, then:

1. State you position and explain the reasons why you have taken it.
2. Explain why your position is superior to the contrary one, stating advantages and disadvantages of both (use at least one referenced source other than our textbook to strengthen your point).
3. Find classmates with an opposing point of view and engage in discussion (not by stating agreement but by questioning or challenging their positions).

Answer 1

In my view R&D expense (internal) should be allowed to be capitalized.

Reason:

These expenses vary from year to year and company to company hence under current rule it makes Financial Statements volatile and comparisons distorted.Basic accounting principle also seems to be in contradictions which expects costs for the period be matched to the revenue which with current rule set is again seems to be in violation.

Reseach and development is a long term investment for companies resulting in many years of revenue and cash flows and profits hence they have a strong case in favour of capitalizataion.This function of the organization cannot be treated at par as other servive functions because of its very nature differs.

Advantage of Capitalization:

Financial statement comparison more realistic and on equal grounds

Adherence to Accounting principal of matching costs to revenue of a period (Matching Principal)

Disdvantage of not Capitalization:

R&D expenses are not uniform from period to period hence volatility in Financial statements creeps in which is not desirable and may not give true and fair view to stakeholders.Many companies in pharma,technology companies experience this.