Big companies invest in innovation and research for growth and expansion. Research and development helps to generate huge profit that usually does not occur without full research. But in order to invest in research and development of the company it is important to invest a big amount of capital so that to make a successful research. The results of the investment are uncertain and it is very hard to measure. Therefore the valuation of the research and development expenditure is hard to predict (Boeing, Mueller and Sandner, 2016).
Research and development activity are expenses relating to the operating expenses, this type of expenses is incurred in finding and innovating new product and services for the product the company is associated with. Research and development is a systematic procedure that is carried out by the company in order to find and discover new solutions and to constantly innovate and upgrade the goods and services and the product of the company. These expenses can be huge for big Corporation. The research and development of the expenses can be very huge for big companies. Research and development is a very important aspect for the company. It gives several benefits to the companies so that they have an upper hand so that it gives the companies certain benefits (Chowdhury et al, 2014).
Research and development helps in several ways such that it becomes an integral part of the organization. Without research and development it almost becomes impossible for the organization to make advancement. The research and development helps the organization to develop new ideas and modernize there working procedure such that they have certain benefits’ that help them to get an edge over their competitors such that they always stay ahead of their competitors in certain ways. Without research and development the company will stuck at a certain situation from which they will fall back and loose there competing power against their competitors (Fulmer and Ployhart, 2014).
Business conducts research and development for bringing or launching a new product in the market. A new product is released in the market place after going through various specimen of R&D. Research and development conducted for bringing opportunity cost and product timeline. Some companies use research and development to upgrade their existing and old product.
Recycler limited is a company which was formed for the purpose of recycling household garbage. The company has been formed for a period of last five and it is running in a profitable manner to survive and exist. With time the company came across the need for the development of the technology to increase the amount the amount of recyclable waste, which includes separation for recyclable and non-recyclable materials. In order to do this the company needs financial help from different institutional and community so that they can carry out their research programmed so that they carry out the research in order to upgrade the technology of the industry.
Richard Rich a well known philanthropists donated $1000000 for the purpose of carrying out research activities. He only told the company to provide him a statement after every six months which shows that the money was used appropriately in research and development (Konda et al,2014).
The issues raised in the company when rich’s cherub of $1000000 arrived and the accounting staff did not know whether to treat the money as revenue or as capital. So they are not sure that whether to show the amount as in revenue account or to show the amount in capital account under donation. So there was a confusion that was building up which was an issue that needed to be solved.
Under generally accepted accounting principle (GAP) a business records the cost and expenses and shows it income statement during the period that it has occurred. On the other hand they can even capitalize it in the statement of accounts. Expenses have effect on the income statement when they are shown as capitalize cost. Therefore it is important to record them appropriately so as to know the correct amount of profit (Marvel, Davis and Sproul, 2016).
New product development which falls under the category of research and development involve gathering data about a new product and technology, where development means conversion of information into their actual product.
Usually small business records new product development cost as expenses and show it in their income statement thus the profit decreases. Whereas in capitalization method which is used to record different types of cost. When a business or a corporation capitalizes a cost it records the existing assets that is present in the income of statement and typically transfer from a portion of capitalize cost to expense on the income statement for the coming years, it therefore reduces the profit gradually for each year and each period (Ploy hart et al,2014).
It records the expense for periods which contribute in the revenue and helps in future benefits. A new product results in a future benefit and it generate revenue for its future period. Even though amount is invested in that particular year it will give benefit of the investment from the particular year.
The accounting rule says that the research and development cost cannot be capitalize and can to be treated as assets rather it is revenue in nature. The purpose of research and development is to realize future benefits in case the business capitalizes research and development in that case it will unduly elevate the total asset of the company which is not proper in nature this increase in value effect the sheet of balance of the company and therefore is to be taken care that such a mistake does not take place while in order to invest in R & D cost would make difference in securing investor capital (Powell et al, 2015).
There is one exception to the rule where capitalization of the R&D cost if the business merges or buys another company then it can capitalize the R&D.R&D cost which comes from the purchase of another company. This is because some portion of the price that is required for acquiring the company was allocated to the project so that this project has a value that can be listed in the project. Where research and development is completed it doesn’t produce tangible results then the full expenses or the amount of the assets can be written-off. The project produces good results (Warusawitharana, 2015). It can be assigned a lifespan from which the project can be benefited and then can be amortized according to the life of the assets.
The discussion that has already been carried out in regard to the case, it has been observed that if the activity is under such a circumstance that is being mentioned in the case then it is to be treated as an expense for the research and development. Any cost that is incurred in creating a new product will not be treated as research and development and will not come under the label of research and development. Research and development is carrying out development of new product, so there are some situations or circumstances that are to be met in order to name that as research and development. Example printing a book with old printing technique will not be considered as research and development. But whereas if the printing is done with a new technique and testing is done for such a technique, in that case it can be considered as research and development. (Baum & Silverman, 2014).
The situation which is being discussed it resembles techniques which are new in nature which are being developed and are new which has been created after research and development. In order to label a product which is new in nature as an outcome of research and development there should be some sort of innovation. Some new ideas should be generated and included in the product so as to label it as research and development. A launch of a product which has no innovation and is made using existing ideas, in that case it is not to be considered as research and development. (Lev, Petronius, and Radhakrishnan, 2012).
With the help of GAAP expense for periods which contribute in the revenue and helps in future benefits. A new product results in a future benefit and it generate revenue for its future period. Research and development helps in maintaining the benefits for the future and helps generate revenue for the organization. There is one exception to the rule where capitalization of the R&D cost if the business merges or buys another company then it can capitalize the R&D.R&D cost which comes from the purchase of another company. If the organization buys another business, in that case the cost of research and development can be capitalize but if not in other case the cost of research and development can not be capitalize. (Clenching and Hwang, 2015).
New product development which falls under the category of research and development involve gathering data about a new product and technology, where development means conversion of information into their actual product. (Liebowitz and Suen, 2013).
Research and development activity are expenses relating to the operating expenses, this type of expenses is incurred in finding and innovating new product and services for the product the company is associated with. Research and development is a systematic procedure that is carried out by the company in order to find and discover new solutions and to constantly innovate and upgrade the goods and services and the product of the company. (Healy, Myers & Howe, 2012).
The research and development helps the organization to develop new ideas and modernize there working procedure such that they have certain benefits’ that help them to get an edge over their competitors such that they always stay ahead of their competitors in certain ways. (Jaffe, 2016)
Under generally accepted accounting principle (GAP) a business records the cost and expenses and shows it income statement during the period that it has occurred. On the other hand they can even capitalize it. Without research and development the company will stuck at a certain situation from which they will fall back and loose there competing power against their competitors. Any cost that is incurred in creating a new product will not be treated as research and development and will not come under the label of research and development. Research and development is carrying out development of new product, so there are some situations or circumstances that are to be met in order to name that as research and development. In order to label a product which is new in nature as an outcome of research and development there should be some sort of innovation. Some new ideas should be generated and included in the product so as to label it as research and development. A launch of a product which has no innovation and is made using existing ideas, in that case it is not to be considered as research and development. (Paul et al, 2012).
Baum, J.A. and Silverman, B.S., 2014. Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups. Journal of business venturing, 19(3), pp.411-436.
Boeing, P., Mueller, E. and Sandner, P., 2016. China's R&D explosion—analyzing productivity effects across ownership types and over time. Research policy, 45(1), pp.159-176.
Chen, M.C., Cheng, S.J. and Hwang, Y., 2015. An empirical investigation of the relationship between intellectual capital and firms’ market value and financial performance. Journal of intellectual capital, 6(2), pp.159-176.
Chowdhury, S., Schulz, E., Milner, M. and Van De Voort, D., 2014. Core employee based human capital and revenue productivity in small firms: An empirical investigation. Journal of Business Research, 67(11), pp.2473-2479.
Fulmer, I.S. and Ployhart, R.E., 2014. “Our Most Important Asset” A Multidisciplinary/Multilevel Review of Human Capital Valuation for Research and Practice. Journal of Management, 40(1), pp.161-192.
Healy, P. M., Myers, S. C., & Howe, C. D. (2012). R&D accounting and the tradeoff between relevance and objectivity. Journal of accounting research, 40(3), 677-710.
Jaffe, A.B., 2016. Technological opportunity and spillovers of R&D: evidence from firms' patents, profits and market value.
Konda, N.M., Shi, J., Singh, S., Blanch, H.W., Simmons, B.A. and Klein-Marcuschamer, D., 2014. Understanding cost drivers and economic potential of two variants of ionic liquid pretreatment for cellulose befoul production. Biotechnology for befouls, 7(1), p.86.
Lev, B., Petrovits, C. and Radhakrishnan, S., 2012. Is doing well for you? How corporate charitable contributions enhance revenue growth. Strategic Management Journal, 31(2), pp.182-200.
Liebowitz, J. and Suen, C.Y., 2013. Developing knowledge management metrics for measuring intellectual capital. Journal of intellectual capital, 1(1), pp.54-67.
Marvel, M.R., Davis, J.L. and Sproul, C.R., 2016. Human capital and entrepreneurship research: A critical review and future directions. Entrepreneurship Theory and Practice, 40(3), pp.599-626.
Paul, S.M., Mytelka, D.S., Dunwiddie, C.T., Persinger, C.C., Munos, B.H., Lindborg, S.R. and Schacht, A.L., 2012. How to improve R&D productivity: the pharmaceutical industry's grand challenge. Nature reviews. Drug discovery, 9(3), p.203.
Ployhart, R.E., Nyberg, A.J., Reilly, G. and Maltarich, M.A., 2014. Human capital is dead; long live human capital resources!. Journal of Management, 40(2), pp.371-398.
Powell, D.M., Fu, R., Horowitz, K., Basore, P.A., Woodhouse, M. and Buonassisi, T., 2015. The capital intensity of photovoltaics manufacturing: barrier to scale and opportunity for innovation. Energy & Environmental Science, 8(12), pp.3395-3408.
Warusawitharana, M., 2015. Research and development, profits, and firm value: A structural estimation. Quantitative Economics, 6(2), pp.531-565
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