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BTEC Higher National Diploma in Business
Unit Number and Title
Unit 13 Financial Reporting Sample Assignment
Financial Reporting Sample Assignment provides a conceptual framework and regulatory framework for financial reporting. This assignment describes the requirement of research and development under UK and International accounting standards because many businesses spend large amount of money annually. This report includes detail study of UK GAAP (SSAP 13) and IAS 38 and R&D (research & development) is treated under UK and international accounting standard.
Requirementof Research & Development: Many businesses of UK adopts research project and development cost in their accounting system on annual basis. Business deploy money in research and development for the development of new and improved product or services as per the trend and demand of the customers in the market. The entities do this to earn a significant amount of income in the future course of business and remain in the competition (Walton & Walter, 2013).
Accounting Predicament of Research &Development: Predicament of research and development means the actual situation of research and development costs under financial statement considered by SSAP and IAS. Every business spends money in the research and development of its product or service to secure its future. Expenses occurred during the research and development is considered as cost. It is considered that if any economic profit is expected to flow in the organisation as a result of research and development cost then in that case these cost should be treated as assets for the business rather than liability. The research and development meet the criteria of the definition of asset prescribed by the Statement of Standard Accounting Practice and International Accounting Standard for the preparation of financial resources statements. As it is impossible to predict whether or not business will incur profit and give rise to the future income so SSAP of UK and IAS (International Accounting Statement) provides accountant with more information to clarify the situation. As per the criteria provided by UK accounting standard and International Accounting standard Research and development cost treated under the category of internally generated intangible asset (Walton & Walter, 2013).
Definition of Research & Development cost: Research and development is an investigative activity undertaken by the business for the improvement of existing products and procedures or to lead the development of new product or procedure. The research and development is not conducted for the immediate or short term profit, it is focused on long term profitability for a company (Walton & Walter, 2013).Research is original and planned investigation carried out by the company for example a pharmaceutical company undertaking activities with an aim to obtain knowledge to develop a new medicine at this earlier stage company could not predict its future economic profit. Development is the activity in which research results are applied by the company to develop a new product, design, material, system or service before starting the commercial production.
Research and Development treated under UK accounting system: Research and Development fall under the category of intangible assets under UK accounting system. Accounting of research and development governed under SSAP-13 of UK accounting system. According to SSAP (Statement of Standard Accounting Practice)-13 researches is not directly related with future economic benefits so it cannot be capitalised (Berry & Jarvis, 2011). Therefore, all research expenditure is written off under the head of profit and loss account as expense when it incur. As like research cost development costs is write off in profit and loss account but another option is also available for the treatment of development cost that is development cost will treated as an intangible asset if the following criteria are met:
If these criteria are met company may capitalise all the development costs and show them in Balance Sheet or company may continue to written off all development cost in profit and loss account. If company adopts the option of capitalising the development cost then it should be applied on all development projects consistently. Under SSAP-13 where development costs are considered as intangible asset they should be amortised over the periods expected to benefits from them. Amortisation starts only when commercial production has been started. Or when developed product or service come into use. The capitalized project is reviewed at the end of every financial year to recognising that the capitalised development cost still met the criteria or not. The SSAP-13 is different from International Accounting Standard, this lead confusion for the companies whether they capitalise development cost or not (Berry & Jarvis, 2011).
Research and Development treated under International Accounting System (IAS): Accounting for research and development comes under IAS 38. IAS 38 deals with intangible assets. Intangible assets are non monetary assets which does not have any physical substance and which are not identifiable. There are three critical attributes under IAS for the intangible asset these are:
R & D comes under the third attribute and considered internally generated intangible asset. The probability of future economic benefits must be based on reasonable assumptions about the future conditions. This probability criteria should be satisfied by the intangible asset that are acquired by the company or internally generated . If the criteria is not fulfilling by the intangible item then as per IAS 38 it should be considered as expenditure when it is occurred. In order to recognise R& D are internally generated intangible asset IAS 38 separate R&D project into a research phase and a development phase (Atrill & McLaney, 2013).
Research Phase: IAS 38 states that it is impossible to predict future profitability at the research stage of the project so all the research expenditures should be written off as an expense under the income statement and will never capitalised as intangible asset of the company.
Development phase: development costs arise in the project should be consider as intangible asset on meeting the following criteria:
If development cost of the asset met the above criteria then it will be capitalised otherwise will be treated as expense under income statement (Atrill & McLaney, 2013).
Comparative study Between IAS 38 and SSAP 13 in relation to the treatment of research and development:
SSAP 13 OF UK
Under IAS 38 provision research cost is considered as expense and write off under the head of income statement.
Under SSAP 13 provision research cost is also considered as expenses and written off under the profit and loss account.
Development cost is considered as asset if specified criteria are met.
If specified criteria are met then company may choose to treat the development cost as asset or expense.
So, this is the basic and slighter difference between the two provisions, IAS 38 and SSAP 13(UK GAAP) which arise conflict for the company that whether they treat development cost as asset or expense (Alexandra & Britton, 2014).
Example: A pharmaceutical company incurs research cost during a accounting year is $ 2, 55,000 and development cost $ 5, 00,000. If company recognise the criteria given under SSAP-13 than it treats research cost as expense and write off in profit and loss account and if the development cost met the specified criteria of SSAP 13 the company may capitalise its development cost and write off as intangible asset in Balance sheet or it can treat development cost as expense also. If it treats development cost as intangible asset then asset of the company will increases by $ 5, 00,000 and if it treats development cost as expenses then expenses of the company increases by $ 5, 00,000 and affect its profitability of the company (Alexandra & Britton, 2014).On the other hand, if company follows IAS 38 provisions than it treats research cost as expense and write off under income statement and development cost met the specified criteria specified under provision than development costs will be capitalised and shown in the balance sheet as intangible asset (Alexandra & Britton, 2014).
The discussion made in the report describes provisions regarding treatment of Research and Development cost under the provisions of IAS-38 and SSAP-13(UK GAAP). There are two different approaches prevailing in UK accounting system for R& D treatment and the both approaches are having slighter difference. IAS-38 gives single solution to treat the development cost as intangible asset if the criteria specified under rules are met so it is a better approach than SSAP-13(UK GAAP).
Alexandra, D. & Britton, A. (2014). International Financial Reporting and Analysis. Andover: South-Western Cengage Learning. Retrieved from http://lib.myilibrary.com/ProductDetail.aspx?id=549474
Atrill, P. & McLaney, E. (2013). Accounting & Finance for Non-specialists. England: Pearson Education Limited.
Berry, A. & Jarvis, R. (2011). Accounting in a Business Context. South-Western Cengage Learning. Retrieved from http:// http://lib.myilibrary.com/ProductDetail.aspxid=328474