Accounting principles are guidelines that set out the recognition, measurement, and disclosure of financial elements. According to the Conceptual Framework of Financial Reporting, it is important to have these guidelines as they help provide useful financial information to the users of these statements. There are many standards that set out accounting principles for different financial statement elements. In revenue and expense recognition, there are many guidelines on how to recognize these elements. However, these guidelines may have different alternatives on accounting practices like matching principle, cash basis, or accrual basis.
SFAS 2 and IAS 38
The Statement of Financial Accounting Standards (SFAS) No. 2 is a guideline on the accounting and reporting of research and development costs. The goal of this standard is to reduce the number of alternative accounting and reporting practices present in the accounting for these costs. This standard sets out the recognition criteria for activities and cost elements that fall under research and development. The standard also sets out the accounting and disclosure of the recognized elements under research and development. SFAS No. 2 provides that all research and development costs, as per the standard, are to be charged as an expense when incurred in the income statement. The incurred costs have to be disclosed in each period when the income statement is prepared (FASB, 1974).
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The IAS 38 Intangible Assets, prescribes the accounting treatment of intangible assets not dealt with in other IFRS guidelines. The standard sets out the recognition, measurement of the carrying amount of these assets, and disclosure. According to IAS 38, intangible assets are assets, as per the Conceptual Framework definition, that are non-monetary with no physical substance. The Conceptual Framework of Financial Reporting defines assets as economic resources that an entity controls due to past events and expects financial benefits in the future. The company has to be probable that these resources will provide future financial benefits (IFRS, 2018).
Research and development costs are described as intangible assets in IAS 38 because they are intangible and a company controls and expects future revenue or reduces costs. According to IAS 38.54, research costs are charged as an expense while the development costs are capitalized after the entity establishes the technical and commercial feasibility of the asset for use or sale. The entity has to complete the asset and use or sell it for it to determine its future economic benefits (IFRS, 2018).
The Matching Principle
The matching principle is an accounting principle that prescribes accounting for expenses only when they can be matched with earned revenue in the same financial period. This principle conforms to the double entry practice of accounting, that is, an expense is related to the generation of revenue hence both should be matched during disclosure. This principle means that an expense in an accounting period with no revenue is deferred until the entity earns the revenue. This principle combines the practice of accrual accounting and revenue recognition principle.
The IAS 38 accounting treatment of development costs adheres best to this matching principle. Under IAS 38, an entity will capitalize development costs in the balance sheet as an intangible asset. Capitalization means recording a cost or expense in the balance sheet so as to delay full recognition of the asset. The asset is amortized over the years until the sale or use of the asset starts to generate revenue. When the equipment starts generating products for sale, the development costs amortized over the years will be recognized as expenses and matched to the new revenue – sale of products.
Conclusion
The IAS 38 accounting treatment of development costs adheres best to the matching principle. It adheres best because it allows for the delay of full recognition of development costs until the entity starts to generate revenue from the asset. However, the SFAS No. 2 requires recognition of development costs as expenses when incurred despite whether there is matching revenue or not.
References
FASB. (1974, October). FAS 2. Retrieved from FASB Website: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220125771&acceptedDisclaimer=true
IFRS. (2018). IAS 38 . Retrieved from IASPlus: https://www.iasplus.com/en/standards/ias/ias38
