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Nature and Value to the Society

Describe about the Accounting Theory and Current Issues for Information System Research.

The assignment represents several aspects of research and development conducted by a bio- research firm with respect to the aqua- culture feeds. The assignment provides the nature and value of the bio- research to the society as well as problems related to the early research by the company. Research and development is a primary step considered by the business organizations to find the optimum methods for producing the products and services with the best quality. Research activity includes investigation while development involves designing, composing and marketing of products and services (Puchades-Carrasco & Pineda-Lucena, 2015).

The assignment also covers the problems that the bio- research firm had encountered with the early research as well as differences between the research and development. Accounting methods including journal for the transactions entered by the firm has also been prepared in the assignment. Apart from the accounting for research and development, fair valuation of patent as per the accounting principles and rules is also presented in the assignment.

Bio- Sustainable Feeds (BSF) Ltd. engaged in the bio- research since two decades with respect to the aqua- culture feed based on plants and fish feds. The research involved a cost of AUD $360 million out of which AUD $120 million collapsed due to failure in survival of high- value piscavorian fish. The research and development also includes the process of conversion of low value fish at the rate of 10.0 kg to high value fish at a rate 1.0 kg. The firm, BSF Limited experienced negative results that involved destruction of 1/3rd of total production of fish as well as size of the matured fish was smaller.

In the recent years, aquaculture is the fastest growing activity as the means to increase the supply of seafood and other food crops. Aquaculture provides value to the society because most of the individuals survive on the diets based on meat and fish along with the food crops (Warusawitharana, 2015). It is considered to be valuable to the society because aquaculture food provides proteins, vitamins, fibers and carbohydrates which are important for human nutrition. The firm is engaged in the research of plant and fish based aquaculture feeds to improve the quality of food crops for the consumption of society. Australia is a country where large number of population survives on sea- food including canola, soya-bean, salmon fish therefore, it is important to produce the crops with the best quality for human consumption (Landau et al. 2015).

Problems with the Early Research

The firm, Bio- Sustainable Feeds (BSF) Ltd involved in the process of research since two decades and encountered with several problems in the early research. The firm experienced the loss of around AUD $120 million due to failure in endurance by high value fishes like trout, tuna, salmon etc. Accordingly, problems that are faced by the BSF with the early research are discussed as follows:

  • Problems in the quality of growing the food crops

One of the significant problems faced by the BSF in its early research is diversion in the quality of growing the food crops for human consumption. The firm observed the diminishing value in growing the food crops with respect to the growth of luxury fish. This problem was faced due to the conversion technologies and equipments used by the firm for plants and fish feeds.

  • Problems in survival of fish feeds

Another problem that the firm faced was the demolishing of fish feeds due to the conversion of low value into the high value. The firm faced the loss of around 30% of the total weight in high value fish feeds while 5% in case of low value.

  • High costs in the process of research and development

Earlier bio- research performed by the firm, BSF Ltd involved huge costs in the various activities of the research and development. Conversion of low value fish into high value fish would involve huge costs along the loss of AUD $120 million. Apparently, the cost of food crops would involve high costs for the human consumption if the firm wants to maintain the same quality of the feeds.

  • Beneficial for the rich society and not for the poor ones

Results of the earlier research would provide the benefits to the rich society but for the poor society, it might reflect the risk of malnutrition and starvation. Since the procedure of aquaculture or fish farming is a hectic process as well as involve huge for several procedures therefore it might not be beneficial for poor society.

Research and development is an investigating process conducted by the business organization to improve the products and services involving the implementation of designs and concepts. It is typically performed on the long- term basis for the profitability and best quality products of the organizations (Dinh, Kang & Schultze, 2015). However, research and development are two different concepts involved in the product life cycle. Process of research involves the discovery of the concepts and methods to create the product while development is associated with designing and processing to create or modify the products and services. Research procedures include study of ideas and concepts to enhance the product quality while development is the execution of findings of research works (Ezzamel & Xiao, 2015).

Explanation and Differences between Research and Development

Accounting of research and development is regulated by the Australian Accounting Standards Board (AASB) 138 Intangible Assets. According to the principles of the standard, the cost of research and development will be recognized in the books of accounts if the following components are present in the research and development transactions.

  • The cost of equipments and services used in the research procedures
  • Salaries, wages or commission related to research process
  • Depreciation charges of the equipments used
  • Any other costs that is directly attributable to the research work.

Further, the cost of research and development is recognized in the books of accounts only if it is probable to receive expected future benefits and its cost can be measured reliably. At the initial stage, expenditure on research and development is to be recognized at cost and is required to be amortized over the future years in proportion to the use of research work (Grabowski, DiMasi & Long, 2015).

In case of grant received by government, the amount should be deducted from the value of carrying cost if such amount of research and development is incurred by the organization. However, of the amount of research and development is written off by the organization, the value of grant should be credited in the profit and loss account (Baskerville & Wood-Harper, 2016).

Organizations and firms are engaged with the process of research and development to develop the products and services with the best and improved technologies and means. Since, the organizations business operations and activities are in large number, it becomes difficult to manage simultaneous accounting of research and development (Stone et al., 2016)). Therefore, research and development is differentiated to present clarity in understanding and presenting better accounting records. Additionally, accounting methods of research cost and development cost are different hence, it is important to segregate the costs involved in research and development of products and services (Bulmer, 2016).

Firms undertake the process of research and development to improve the quality of products and services to provide with “Unique Selling Point” (USP). The process of research and development provides the organization, a right to acquire patents as legal protection for the methods and techniques used to manufacture and develop the products. Similarly, investment in research and development assists the business organization with tax benefits and opportunities (Toker, Turker & Vural, 2016).

In the given situation, the expected net market value of the patent of BSF Ltd. is AUD $ 700 million if it is sold in 2 years or AUD $ 200 million each year with the useful life of 10 years.

Expected net market value of the Patent

Amortization period

Discount rate

Amortization Amount- year 1

Amortization Amount- year 2

Adjusted Amount in the accounting year

$ 700 million

2 years

8% p.a.

350

324.1

350

$ 200 million each year for 10 years, if it is produced and sold as well as adjusted for two years

10 years

8% p.a.

200

185.2

385.2

Table 1: Valuation of Patent

(Source: Created by author)

Accounting of Research and Development

However, if the patent is used for 10 years, the total expected market value would be AUD $2000 million with the adjustment in amortization value for two years. As per AASB 138, the initial cost of patent is recognized if its future economic benefit will flow into the entity. BSF is engaged in research work since two decades therefore it would be suitable to consider a patent with useful life of 10 years. Therefore, the fair market value of the patent AUD $2000 million with 10 years of useful life is AUD $1311 at discounting rate of 8%.

Market value-per year $ million

Discounting factor 8%

Present value $ million

200

0.926

185.200

200

0.857

171.400

200

0.794

158.800

200

0.735

147.000

200

0.681

136.200

200

0.630

126.000

200

0.540

108.000

200

0.500

100.000

200

0.463

92.600

200

0.429

85.800

Total

6.555

1311.000

Table 2: Fair value of Patent

(Source: Created by author)

Journal entries for the research and development transactions in the books of Bio Sustainable Feeds (BSF) Ltd from the accounting year 2013 to 2016 are as follows:

Year

Particulars

$ AUD million

   

Dr.

Cr.

2013

Bank A/c                                         Dr.

500.00

 
 

To Government Grant Received A/C

 

500.00

 

(Being grant received from Commonwealth Scientific and Industrial Research Organization for research and development work in the year 2013)

   

Year 1

Research & Development cost           Dr.

340.00

 
 

To Bank A/C

 

340.00

 

(Being the amount spend on research work recognized during the year 2013 to 2016)

   

Year 2

Research & Development cost           Dr.

160.00

 
 

To Bank A/C

 

160.00

 

(Being the amount spend on research process recorded during the year 2013 to 2016)

   

2016

Research & Development cost           Dr.

360.00

 
 

To Bank A/C

 

360.00

 

(Being the cost of research process accounted during the year 2016)

   

2016

Loss on Research & Development      Dr.

120.00

 
 

To Research & Development A/C

 

120.00

 

(Being the loss of research cost recorded due to lapse of high value fish survival during the process of research work)

   

2016

Equipment A/C                                   Dr.

200.00

 
 

To Research & Development A/C

 

200.00

 

(Being development cost expected to incur has been capitalized)

   

2016

Patent A/C                                          Dr.

1,311.00

 
 

To Bank A/C

 

1,311.00

 

(Being fair market value of Patent with estimated useful life of 10 years has been capitalized during the year)

   

2016

Amortization Expenses A/C                 Dr.

385.20

 
 

To Patent A/C

 

385.20

 

(Being value of Patent has been amortized in proportion to the useful life of 10 years and adjusted for two years)

   

2016

Profit and Loss A/C                            Dr.

385.20

 
 

To Amortization Expenses A/C 

 

385.20

 

(Being amortized expenses of patent has been transferred to Profit and Loss A/C during the year)

   

Table 3: Journal Entries

(Source: Created by author)

Patent is an exclusive right approved by the sovereign state to the investor or business owner for a limited period. It restricts the other manufacturers or producers to use such exclusive designs, concepts and processes for the production, modification or improvement of products. It is an intangible asset and is essential to record in the books of accounts since it is a legal authority to forbid others from using the unique technologies of the patent user (Bhaduri & Selarka, 2016). Therefore, it is important to recognize the values of the patent by following the standards and principles of the AASB.

Valuation of method is essential and can be done using economic analysis that uses three approaches i.e. cost, income and market. As per the cost approach, value of patent is determined by the replacement cost to protect the right whereas under income approach, the value of patent is measured by using future cash flows. According to the market approach the value of patent is derived based on the willingness of payment for similar asset by other buyers. Additionally, the value of the patent can also be measured by using the technological process, business of the firm and purpose of the conducting the research (Deephouse, Newburry & Soleimani, 2016).   

In the given situation, BSF Ltd. stated that the valuation of its patent has been predicted for the exclusive control over the bacteria based feeds technology. The firm is involved in the bio- research process by using aquaculture feeds for the purpose of improving the quality of food crops. Since the firm’s research process includes conversion of low value fish feeds to high value fish feeds, the management’s contention is correct and valid for predicting the value of patent.

Reasons for Differences and Engagement in Research and Development by Firms

Conclusion

It can be said concluded that the bio- research firm, listed on the Australian Stock Exchange involved in the research and development of aquaculture sea feeds for human consumption. Initially the firm faced certain problems with the research procedures including loss of AUD $120 million but later it used bacteria based feeds to overcome the issues. The firm also received grant of AUD$500 million from CSIRO, Federal Government of Australia in the year 2013. BSF Ltd. utilized the amount of grant between the year 2013 to 2016 and expected to spend further of $200 million for the development of aquaculture feed. Additionally, the firm also predicted the value of patent based on the technology for its useful life of 10 years at a discount rate of 8.0% p.a.

Reference List

Baskerville, R. L., & Wood-Harper, A. T. (2016). A critical perspective on action research as a method for information systems research. In Enacting Research Methods in Information Systems: Volume 2 (pp. 169-190). Springer International Publishing.

Bhaduri, S. N., & Selarka, E. (2016). Corporate Governance and Corporate Social Responsibility—Introduction. In Corporate Governance and Corporate Social Responsibility of Indian Companies (pp. 1-10). Springer Singapore.

Bulmer, M. (2016). Some problems of research into class imagery. Working-Class Images of Society (London 1975), 163-79.

Deephouse, D. L., Newburry, W., & Soleimani, A. (2016). The effects of institutional development and national culture on cross-national differences in corporate reputation. Journal of World Business, 51(3), 463-473.

Dinh, T., Kang, H., & Schultze, W. (2015). Capitalizing Research & Development: Signaling or Earnings Management?. European Accounting Review, 1-29.

Ezzamel, M., & Xiao, J. Z. (2015). The development of accounting regulations for foreign invested firms in China: The role of Chinese characteristics. Accounting, Organizations and Society, 44, 60-84.

Grabowski, H. G., DiMasi, J. A., & Long, G. (2015). The roles of patents and research and development incentives in biopharmaceutical innovation.Health Affairs, 34(2), 302-310.

Landau, B. J., Jones, D. R., Zarnoch, C. B., & Botton, M. L. (2015). Development of Aquaculture Methods to Enhance Horseshoe Crab Populations: An Example from Delaware Bay, USA. In Changing Global Perspectives on Horseshoe Crab Biology, Conservation and Management(pp. 513-536). Springer International Publishing.

Puchades-Carrasco, L., & Pineda-Lucena, A. (2015). Metabolomics in pharmaceutical research and development. Current opinion in biotechnology,35, 73-77.

Stone, L. L., Mares, S. H., Otten, R., Engels, R. C., & Janssens, J. M. (2016). The co-development of parenting stress and childhood internalizing and externalizing problems. Journal of psychopathology and behavioral assessment, 38(1), 76-86.

Toker, H., Turker, D., & Vural, C. A. (2016). Social Responsibility Education in Turkey. In Social Responsibility Education Across Europe (pp. 1-28). Springer International Publishing. 

Warusawitharana, M. (2015). Research and development, profits, and firm value: A structural estimation. Quantitative Economics, 6(2), 531-565.

Bibliography List

Bruck, P., Réthy, I., Szente, J., Tobochnik, J., & Érdi, P. (2016). Recognition of emerging technology trends: class-selective study of citations in the US Patent Citation Network. Scientometrics, 107(3), 1465-1475.

Grimaldi, M., Cricelli, L., Di Giovanni, M., & Rogo, F. (2015). The patent portfolio value analysis: A new framework to leverage patent information for strategic technology planning. Technological Forecasting and Social Change,94, 286-302.

Han, E. J., & Sohn, S. Y. (2015). Patent valuation based on text mining and survival analysis. The Journal of Technology Transfer, 40(5), 821-839.

Harris, K. M., Phelan, L., McBain, B., Archer, J., Drew, A. J., & James, C. (2016). Attitudes toward learning oral communication skills online: the importance of intrinsic interest and student-instructor differences.Educational Technology Research and Development, 1-19.

Odasso, C., Scellato, G., & Ughetto, E. (2015). Selling patents at auction: an empirical analysis of patent value. Industrial and Corporate Change,24(2), 417-438.

Ware, L., & Warren, J. (2016). Rule of reason for post-expiration patent royalties. Journal of Intellectual Property Law & Practice, 11(1), 37-45.

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