Many companies spend significant dollars on Research and Development (R&D) to de

Question

Many companies spend significant dollars on Research and Development (R&D) to develop new patents, products, service lines or copyrights. For example, Apple spent over $10 billion on R&D during the year ended 9/24/16.

Accounting rules define an asset as something with future economic benefits. The entire reason for R&D expenditures is to realize a future economic benefit. However, accounting rules require R&D costs to be expensed in the period incurred. Those expenditures cannot be capitalized and treated as an asset (e.g. amortized), even if the R&D is successful.

Some businesses executives argue that net income and assets are understated with the current accounting approach and disagree with the current rules. According to the Financial Accounting Standards Board (FASB), the rule-making body for U.S. business accounting, the reason for expensing R&D lies in the difficulty of assigning costs to specific R&D projects and in quantifying future benefits.

Assume that you are either (a) the president of a company that is very dependent on ongoing research and development, writing a memo to the FASB complaining about the current accounting standards regarding research and development, or (b) the FASB member defending the current standards regarding research and development. Your memo should address the following questions.

1. By requiring expensing of R&D, do you think companies will spend less on R&D? Why or why not? What are the possible implications for the competitiveness of U.S. companies?

2. If a company makes a commitment to spend money for R&D, it must believe it has future benefits. Shouldn't these costs therefore be capitalized just like the purchase of any long-lived asset that you believe will have future benefits?

Explanation / Answer

1. For R&D, the companies spend considerable amount of money to develop new product,patent and copyrights.They should spend because they are the source for future economic benefits.

U.S. Companies like Apple has spent 10 billion dollar on R&D only to make a leadership in their domain area and it is true also.

In U.S., The financial Accounting Standard Board,the main rule making body for us business accounting give the reason for spending in R&D that there is difficulty of assigning costs to the specific R&D projects and in quantifying future benefits. The main criteria for spending huge in R&D in America is that they should not face any competition in world market in using the product and services. They have more numbers of patents and copyrights and a numbers of new inventions in all around.

2. Any investment must have the returns and if these companies are committing to spend on R&D activities, they are spending only on the concept that future returns will be more.

It is true that R&D acoount should have the accountibility of investment sothat in future they can recover the investment with interest.

Conclusion- Any nation like U.S or other should have a committment towards R&D because desires never fulfil for a customer and definitely they require new product and new technology for its future generation and hence the statement is true about R&D investment

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