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?