Accounting for Research and Development Deals Activities

Question: Discuss about the Accounting for Research and Development Deals Activities. Answer: Introduction: The accounting for research and development deals with activities that improves the processes and product. The terms of research and development is used in the standard with the following meaning. Research is the planned and the original investigation, which is undertaken by the entity to gain technical and scientific knowledge and understanding. On the other hand, development is the application of the knowledge gained or using the finding from the research for producing improved or new product, processes, services and material. The development is undertaken prior to the commencement of the usage and commercial production. The activities encompassed in the research and development is difficult to identify (Barge-Gil Lpez, 2014). The definition provided assist the reporting entities in classifying their activities under the research and development. The distinction of the activities are based on the organization types, types of the project undertaken and the types of business. The medium sized firm had confusion about the formal definition of Research and development while the small firms understood the concept of R D in an informal way. The FRS 13 deals with the accounting for the activities related to the research and development. The activities related to research and development are distinguished from those activities that are non-research based because of the absence and presence of appreciable elements of innovation (Bebbington et al., 2014). Discussion: The core accounting rule in the area of research and development are the expenditures that is to be charged as an expense when incurred. The expenditure, which is incurred on research, is not directly related to the future economic benefits and capitalizing the cost that does not comply with the accrual concept. The expenditure related to the research, development is written off to the account of profit and loss, and this is because the expenditure on the research does not provide the entity with the direct future economic benefits. The expenditure on the development cost has to be written off as the expense incurred to the profit and loss account. However, there is the option of deferring the expenditure incurred in development and it can be carried out as the intangible assets on the entity meeting some criteria. The research and the development costs are need to be separated in order to achieve the reasonable degree of comparability between the accounting period of the same entity and between the entities (Bowen et al., 2013). Literature review on accounting for research and development: For sustaining the dynamic economy of New Zealand, the research and development is an important concept. The socio economic issues of New Zealand is addressed sing the accounting for R D. The literature review is provided on the expenses relating to R D. The harmonization in the accounting treatment of the research and development is unlikely to happen. The capitalization of R D has always remain a controversial issue. The revised International accounting standard 38 make the distinction between the development and the research phase. The expenditure of carrying out research should be treated as an expense (Deegan, 2013). A reporting entity cannot demonstrate during the research phase of the project that whether the intangible assets are capable of generating the probable future economic benefits or not. The expenditure on research should be recognize as expense and there is the need to recognize the assets arising from the research. The intangible assets needs to be recognized in the development phase if the entity is able to demonstrate the ability to sell or use the assets. The entity also needs to demonstrate the whether the intangible assets are technical feasible for using or selling purpose. The ability to measure the expenditure related to the development to of the intangible assets should also needs to be demonstrated. The treatment of research and accounting provides for the flexibility between the choice of capitalizing and expensing. As a result of which, the companies that are more leveraged are encouraged to activate their cost related to R D rather than expensing them. The managers are motivated to prevail such accounting decisions over the other. It is argued that the high debt level forces the company to capitalize on the expenditure of R D. The choice available to the company because of this decreases the debt ratio and increases the accounting profit. The firms are encouraged to make the accounting decisions that are income increasing (Daske et al., 2013). Implication of the present accounting profession and the commercial environment: The accounting for research and development has the implication on commercial environment in terms of the accountability initiatives. The development and the research makes the strategic focus rather than the university accounting and the professional curricula. The developments provide the platform for the wider interest of public and this improves the relevance of the information to enhance the process of decision-making. The various business leaders and the accounting profession has embraced different types of corporate reporting. This is known as the integrated reporting. The research and development would enrich the appreciation and understanding of the accounting academics of New Zealand for the achievements and efforts of the early builder sin the accounting field (Dinh et al., 2015). Past debate in relation to the issue: The basic issue concerning the accounting for research and development is the expenditure. The expenditure associated with the research and development is that there is no certainty in the future benefits and it makes it difficult to treat and record the expenditure as an asset. Because of this, the GAAP has made it mandatory to charge the expenditure as an expense incurred. However, this cannot be regarded as entirely pervasive as there are some limitations to it (Mynatt Schroeder, 2012). The current tax treatment about research and development is uncertain. The measures of taxation does not have anything to address the uncertainty. The uncertainty over the treatment of taxation of research and development is not addressed sing the current measures. The main area of concern is the revenue and capital R D expenditure. The ambiguity in the treatment of taxes comes from whether the cost are classified as capital or revenue. If the taxpayer has enduring benefit, then the cost is classified as expenditure and otherwise it is classified as the revenue expenditures. It is not clear in the tax law of New Zealand when the expenditure related to the R D is immediately deductible and when the expenditures are not immediately deductible. This comes with the risk of disputes that are potential in nature. This risk of disputes exist with the Inland Revenue. When the taxes are underpaid, this comes with the risk of use of money interest and penalties (Healy Palepu, 2012). The method of accrual accounting in New Zealand is faced with a number of issues. The reporting entity encounters with a number of issues when they intend to correctly identify the cost related to the research and development. The accounting treatment of the cost for the purpose of tax is also the major issue faced by the reporting entity. The financial reporting standard relies on the accounting treatment for the amortization of the development expenditure at the end of the process of research and development. Recent development: The development of the New Zealand equivalent to the IFRS for the purpose of application by the entities of New Zealand. This would also include references to the regulatory environment. The harmonization of the financial reporting standard by liaising with the Australian accounting standard Board. There are also new development in the business environment (www.ifrs.org, 2016). The tax rule concerning the research and development is about the cashing out off the losses from taxes. The companies building the service or product would make the expense until the development of the product and it will make losses until the revenue is being generated. The losses attributable to the development would be carried forward to the next year when the company starts making profit by selling the developed products. The changes allows the tax loss due to research and development to cash out their loss, which arises from the expenditure of the research, and development. The new development focuses on the newly started companies who are engaged in the intensive research and development. This is intended to reduce the exposure of the startups to the market failure and the distortion in the taxes, which arises for the treatment of the losses attributing from taxes in the current scenario (Kelsey, 2015). Expenditure accruing to certain types of expenditures are not included in the measurement and the cost that are claimed by the company must be related to the research and development. The cost might include office cost relating to R D, wages, salaries and the contractors cost. It also include the depreciation of the assets that are solely used for the purpose of research and development. The newly developed regime allows cash out losses. However, there are some limits imposed by the regime. The cost related to the research and development shall comprise of all the activities that are directly attributable to the activities undertaken under the research and development. The cost needs to be allocated to such activities on a reasonable basis. The research and development costs between the entities should be separated to make a reasonable degree of comparability. The distinction should be made between the development cost and research cost. The proposal is to address the uncertainty by clarifying the revenue or capital boundary. This is done by allowing the taxpayers to follow such accounting treatment where the expenditure related to the R D is immediately written off for accounting. This will immediately deducted for the taxation purpose. Any types of expenses incurred in undertaking and carrying out the research are deductible immediately for the taxation purpose. There are some criteria for the treatment of the expenditure on development and this decides whether it will be immediately deductible or not. This will provide the payers of taxes with more certainty and the result would be the fewer disputed between the Inland Revenue and the taxpayers. This will help the businesses to focus less on the tax affairs and enable them to concentrate on their businesses (Knechel et al., 2012). Future development: The adoption of International reporting standard in New Zealand has reassessed the role of financial reporting standard board (FRSB). The FRSB needs to add material, which would describe the applicability and the scope of the standard in New Zealand. Some of the arguments can be made about the future developments. Due to the cost incurred in the research and development, the economic benefits are expected to flow to the entity; therefore, it can be argued that rather than treating the cost as an expense, it should be treated as assets. This is so because it is align with the assets definition prescribed by the International accounting standard framework for the preparation and the presentation of the financial statements and with the statements of principles. There is a need to provide accountants in New Zealand with more information so that the situation is clarified. The development and the adoption to the international reporting standard will make possible the comparability and th e universality of the accounting treatment of the research and development internationally and regionally (Samkin Deegan, 2012). Regulatory environment: The accounting standard board of New Zealand issues the accounting standard in New Zealand. The profit entities reports under the International financial reporting standard (IFRS) of New Zealand. These are the standards developed by the accounting standard board of New Zealand. The External reporting board does the approval of these standards. The entities are adapting their financial function as per the standard to achieve the efficiency for long term and met the requirement of the standards. The entities, which are currently reporting under the old GAAP, will need to be adapt to the New Zealand International financial reporting standard. However, the International financial reporting standard of New Zealand and International financial reporting standard are different (Naranjo et al., 2015). The former also deals with the domestic standards and this deal with the areas that are not dealt under the IFRS. The transitional requirements of both the standard are different (Nobes 2014).The framework of accounting standard at the current scenario is implemented in three stages. In the first stage, the entities which mainly involves changes to the profit entities accounting standard. The second stage involves changes for public entities. Thirdly, the changes to the accounting standard of the profit and public entities. The companies that is the reporting entities are significantly affected by the accounting of the research and development. However, it is more confined to the entities engaged in the research and development. Conclusions: The purpose of the report is to provide the insight into the accounting for the research and development in New Zealand. There are some gaps as per the literature review. The analysis presented in the reports suggest that the financial reporting regime of the international accounting standard is viable and is an alternative to the existing financial regime of New Zealand. Adopting to the International Financial reporting standards would provide the country with the long-term net benefits. The country should adopt to the IFRS in a manner, which would preserve their commitment to such financial reporting standard, which is sector neutral for New Zealand. New Zealand should look forward to ensure the high standing in the long term and should not be complacent. The country can be an important contributor in the development of the internationally accepted financial reporting in the accounting of research and development. Reference: Barge-Gil, A., Lpez, A. (2014). RD determinants: Accounting for the differences between research and development.research Policy,43(9), 1634-1648. Bebbington, J., Unerman, J., O'Dwyer, B. (2014).Sustainability accounting and accountability. Routledge. Bowen, R. M., Jollineau, J., Margheim, L. (2013). Corporation's Intellectual Property: Accounting For Research And Development Under US GAAP Versus IFRS.Journal of Business Case Studies (Online),9(4), 321. Daske, H., Hail, L., Leuz, C., Verdi, R. (2013). 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