Research and development costs employ a substantial impact on the economic situation of a company that is the reason why the discussion by many on the chance to capitalize internally developed intangible assets is in the accounting literature. According to the IFRS framework, the main role of financial accounting is to offer detailed information and changes on the financial position that the company uses to make a useful decision. The information should have a certain level of understanding, be reliable and comparable for it to be deemed useful.
There exist main conceptual differences between U.S. GAAP and IFRS during Research and Development activities in accounting process: U.S. GAAP happens to be rule-based while IFRA runs under specific principles. U.S. GAAP considers development and research costs as expenses while under IFRS if certain principles are met development costs are capitalized while the research costs expensed. IFRS recognizes intangible assets that arise from development if the company meets the principles. Many costs that a company incurs have the same characteristics to those that result from R & D activities (Mindermann & Brosel, 2009). For example, costs incurred when starting up a new retail outlet, costs from marketing research, costs of training new staff, and promotion costs of the company’s new service or product. The FASB and IASB have to differentiate these costs from the research and development costs and therefore define these costs in their respective standards such as IAS 38 for intangible assets and FAS No. 2 for the statement of financial accounting standards. Although these activities are almost similar in FAS 2 and IAS 38, U.S. GAAP and IFRS have different treatments for each. The Thomas Company has incurred certain costs from the development of the new division. Under FAS 2, the R &D costs include material costs and other equipment that have no future uses and salaries, and they are charged to expense when incurred. The company discloses the total costs during the preparation of the income statement in the financial statements in each period (Mindermann & Brosel, 2009).
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According to the IAS 38, research expenses are expense, and the rule does not recognize intangible assets that arise from research process of an internal project. Besides, an intangible asset that develops from development activities is only recognized if the company can reuse or sell the asset or has the intention of doing it. The main difference between U.S. GAAP and IFRS is that IAS 38 assumes that the company can identify expenses incurred during development phase in their project. Many technology companies in the United States recognize the accounting for R & D processes. However, differences of how these activities are accounted for affects the reported cash flows of an organization. The only and main way of differentiating between the two approaches for accounting for R & D costs is identifying whether expenditures of the intangible assets will generate future earnings or revenues which will strengthen the argument of recognizing the costs as assets. There are relative risks of investments in these projects as they are not guaranteed or reliable ( Benston, Bromwich, & Wagenhofer, 2006) .
The accounting treatment of the costs incurred in research and development phases represents one of the many trade-offs a company faces among reliability, cost-benefit and relevance considerations. Just like in the Thomas Company where estimated useful life of the equipment is 10years, the benefits may vary in future. The nature of the company and the importance of the development projects have a major impact on the need to capitalize the development costs. IAS 38 affects mid to long-term development contracts and technology sector companies. Technology companies may need to upgrade their projects from time to time, and thus it is important for Thomas Company to implement in a costing system to receive reliable development cost information.
References
Benston, G. J., Bromwich, M., & Wagenhofer, A. (2006). Principles ‐ versus rules ‐ based accounting standards: the FASB's standard setting strategy. Abacus , 42 (2), 165-188.
Mindermann, T., & Brosel, G. (2009). Does the capitalization of internally generated intangible assets according to IAS 38 really provide useful information? Ekonomia Menedżerska , (6), 7-16.
