Question

Synergy, Inc., a biotechnology company, developed and patented a diagnostic product called Revertex. Synergy purchased some research equipment to be used exclusively for Revertex and subsequent research projects. Synergy defeated a legal challenge to its Revertex patent, and began production and marketing of the product. Corporate headquarters' costs were allocated to Synergy's research division as a percentage of the division's salaries. Your assignment: Take a position on the appropriate accounting for R&D costs (capitalization, expensing, or that companies should be able to choose either capitalization or expensing). Provide a list of arguments in support of your view. Do not let the method required by the FASB influence your decision. Your arguments should be based on your interpretation of the merits for the choices available.

Answer 1

Solution :

R&D costs majourily occured to enhance the existing product or make a new product. The expenses incurred on such are very high and it can impact the Profit and Loss Account of a company. If a company expects that the future economic benefit due to such expenditure is expected to flow to the entity, these costs should be treated as an assets rather than expense because if a product gives the future economic benefit or let say benefit for more than a year, then as per accounting standards, it should be capitalied.

Other aspect is that if the same is expensed off in profit and loss account, it will result in huge amount of loss which can impact on the trust of investors and have negative impact on the stock also.

To decide whether the same can be expensed off or capitalised, company should analyse on the few aspects i.e.

a. amount of expenditure

b. fututre economic benefit due to such expenditure

c. is project income expected to outweigh cost

d. Technical feasible and commercial viable

e. Cost of R&D can be measured reliably

f. intention of company whether to sustain or sell. etc

After looking the above mentioned criteria, the management has to identify whether the same can be capitalised or expensed off and both.