International Accounting Standards Board, Research and Development Expenditures - Assignment Example

Accounting Standards Name: Subject: Professor: Institution: Date: Question 1 The acronym IASB refers to the International Accounting Standards Board. It is an autonomous, private-sector institution that is responsible for developing and approving International Financial Reporting Standards (IFRSs). It operates under the oversight of the International Financial Reporting Standards Foundation and was established in 2001 as a replacement for the International Accounting Standards Committee (Deloitte, n.d.). According to the International Financial Reporting Standards (2015), the mission of the IASB “is to develop IFRS that brings transparency, accountability and efficiency to financial markets around the world”. The International Financial Reporting Standards (2015) has further noted that as part of the mission, the work of IASB also serves the interest of the public by promoting trust, growth, as well as long-term financial stability in the global economy. Harmonization of accounting practices is the process of improving the suitability or compatibility of accounting practices by establishing limits on the extent to which these practices can vary. The process of harmonization of accounting standards or practices will not be affected by conflicts of logic and it can enhance the compatibility of financial data from different nations. This means that harmonization does not take a one-size-fits-all approach but it provides accommodation to some of the agreements. It is more open and flexible. On the other hand, standardization of accounting practices involves determination of a collection of rigid rules and the application of one rule or standard in any situation. In standardization, the determined standards do not provide accommodation for the dissimilarities between countries. Standardization is more difficult to implement globally since it entails harmonizing accounting standards relating to disclosure and measurement, disclosures by public companies that relate to securities offering as well as listing on the stock exchange, as well as harmonization of auditing standards (BERTHA08, 2012). There is always a strong and constant debate for, as well as against, the adoption of International Financial Reporting Standards. According to Tarca (2013), one of the arguments that are often put forth in favor of the adoption of IFRS is that the use of a single set of high-quality standards by business firms globally has a prospect to improve the transparency and comparability of financial information and minimize the costs associated with preparation of financial statements. Secondly, Tarca (2013) further suggested that when these standards are applied meticulously and in a consistent manner, capital market players will have access to better quality information for more effective decision making. Consequently, markets can allocate funds in a more efficient manner and companies can achieve lower capital costs. The third argument in favor of IFRS is that adoption of IFRS increases mutual fund ownership and cross-border investment for mandatory adopters by reducing the cost of information processing for foreign investors as a result of improved comparability of financial information, as well as directly by eliminating barriers like geographic distance (Tarca, 2013). On the other hand, one of the arguments against the adoption of IFRS is that the supposed benefits of improved transparency in financial reporting and the corresponding lower capital costs are overstated. It is not likely that financial reporting practices will improve considerably because of IFRS adoption. The supposed advantages of cross-border comparability are exaggerated because IFRS is not capable of doing anything when it comes to other factors that may affect reporting like a country’s legal institutions, capital markets, a firm’s governance and business practices, as well as the personal motives of managers. While a single system of financial reporting for international firms is one of the major selling points of adoption of IFRS, this ignores statutory or national reporting for the foreign subsidiaries of international companies. These issues will continue to generate divergence or deviation in reporting (Ulvog, 2011). Secondly, the supposed reduction in the cost of capital, reflecting enhanced information comparability and increased disclosure will only occur in countries that have strong legal enforcement (Tarca, 2013). In fact, Ramanna & Sletten (2009) have suggested that adopting IFRS may be costly if the relative quality of a country’s accounting standards and its related governance institutions are mutually not compatible with the IFRS. The other argument against adoption of IFRS is that in case something arises that would be viewed as a deterioration or drop in the accounting methods from the U.S. perspective, there is only one simple option: the frequently raised concern that IASB could establish new IFRS that may not suit a American investors or firms could be addressed by devising a national endorsement procedure for amended and new IFRS, something that many countries that already adhere to international standards have too. Consequently, if a particular rule is not favorable according to the American perspective, the country can opt out, something that other nations are currently doing (Ulvog, 2011). Question 2 Research expenditure refers to the expenses associated with the original as well as planned investigation that is undertaken with the vision of gaining new technical or scientific understanding and knowledge (Retallack, 2015). For example, research expenditure for a pharmaceutical company is undertaking tests or activities that are geared toward gaining new knowledge to create a new vaccine. The firm is researching the unfamiliar, and thus at this stage there is no future financial benefit that is projected to flow into the company. Development expenditure refers to the costs associated with the application of knowledge or research findings to a design or plan for the production of substantially improved or new materials, products, systems, processes, services, or devices, prior to the commencement of commercial use or production (Retallack, 2015). For instance, development expenditure for a pharmaceutical company might involve designing, developing, and testing of a vaccine. According to the Retallack (2015), research expenditure (apart from spending on fixed assets, which must be capitalized and amortized in the course of their useful lives) must be written off in the year of expenditure via profit and loss account. Similarly, development expenditure needs to be written off in the year of expenditure apart from in specific instances that are strictly defined. In cases where every relevant criterion is fulfilled, it is acceptable to defer the development expenditure so long as its recovery can be rationally considered as guaranteed (Retallack, 2015). The condition that all research and development expenditure be expensed instantly is a conservative and applicable solution that helps to ensure consistency in accounting practice as well as comparability among firms. One may argue in favor of this accounting practice that from an income statement perspective, the long-term application of the standard often makes an insignificant change. This is due to the continuous nature of many firms’ research and development activities, whereby the research and development expenditure charged to expense every accounting period is usually the same regardless of whether there is instant capitalizing or expensing and a subsequent amortization. There are several conditions or factors that have to be met before any expenditure on development can be capitalized. Brice (2009) noted that an intangible asset that arises from development or from the development stage of an internal project can only be capitalized if there is reasonable evidence of the technical viability or feasibility of implementing the intangible asset to the extent that it will be available for sale or use. Secondly, it must demonstrate intent to implement or complete the intangible asset for the purpose of using or selling it. The third condition is that it must demonstrate an ability or potential to sell or use the intangible asset. The other criterion is that it must demonstrate the manner in which the intangible asset will create, generate, or produce economic benefits in the future. Brice (2009) has further pointed out that besides other conditions and requirements, the entity may demonstrate that a market for the intangible asset’s output or the intangible asset itself exists, if the aim is to use it internally, and the usefulness or value of the intangible asset. The fifth condition is that it must demonstrate the availability of sufficient financial, technical, as well as other resources that are required to complete or implement the development and sell or use the intangible asset (Brice, 2009). However, it is worthwhile to recognize that the extent to which firms meet this capitalization conditions may vary. For example, from the pharmaceutical industry viewpoint, there is a likelihood that biotech and pharmaceutical firms will only fulfill the recognition condition in the late stages of development because approval of drugs from the FDA and other regulatory bodies would be necessary before any commercial viability of the drug can be demonstrated. References BERTHA08 (2012) Chapter 8: International Accounting Harmonization. Retrieved from: https://bertha08.wordpress.com/2012/06/03/chapter-8-international-accounting-harmonization/ Brice, S. (2009) Implications of Capitalizing Development Costs. AICPA Store. Retrieved from: https://www.aicpastore.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2009/CPA/Sep/DevCosts.jsp Deloitte (n.d.) International Accounting Standards Board (IASB). About IASB. Retrieved from: https://www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/iasb International Financial Reporting Standards (2015) ASB Chairman Presents New Mission Statement. Retrieved from: http://www.ifrs.org/Alerts/Conference/Pages/IASB-Chairman-presents-new-mission-statement-April-2015.aspx Ramanna, K. & Sletten, E. (2009) Why do Countries Adopt International Financial Reporting Standards? Harvard Business School. Retrieved from: http://www.hbs.edu/faculty/Publication%20Files/09-102.pdf Retallack, B. (2015) Research and Development. ACCA: Retrieved from: http://www.accaglobal.com/my/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/rd.html Tarca, A. (2013) The Case for Global Accounting Standards: Arguments and Evidence. Retrieved from: http://www.ifrs.org/Use-around-the-world/Documents/Case-for-Global-Accounting-Standards-Arguments-and-Evidence.pdf Ulvog, J. (2011) Arguments for Adopting IFRS are Weak, Arguments against have Validity. Therefore we Obviously Should Adopt IFRS. Accounting, Retrieved from: https://attestationupdate.com/2011/06/28/arguments-for-adopting-ifrs-are-weak-arguments-against-have-validity-therefore-we-obviously-should-adopt-ifrs/ Read More