This article consists of 12 pages and 4511 words.The Impact of capitalising research and development on the value of financial statement in technological industry. In order to have full access to this article, email us at thedocumentco@hotmail.co.uk
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Introduction
The section aims to conduct the literature review analysis to evaluate the impact of capitalization of R&D expenditure on the financial statements of the technological companies. Firstly, the importance of R&D expenditure in technological industry has been discussed.
Afterwards, different ways to treat R&D expenditure have also been discussed which include capitalizing it as intangible assets or charging it to expense in the same year. The International Accounting Standard 38 has also been discussed to highlight the appropriate treatment for the R&D expenditure by technological companies.
Most importantly the impact of capitalizing R&D has been discussed on all financial statements and financial ratios in detail and all the differences have been highlighted the appropriate treatment for the R&D expenditure by technological companies.
Most importantly the impact of capitalizing R&D has been discussed on all financial statements and financial ratios in detail and all the differences have been highlighted.The Impact of capitalising research and development
R&D Expenditure in the Technological Industry
In the view of Chiesa (2001), R&D expenditure refers to the costs incurred by the companies for further R&D / improvement of their product offerings. Expenses incurred to find new product or service or to tap a totally new market are often referred to as the R&D expenditures.
It also includes the money that companies spend to increase the level of knowledge of their employees; it includes all kinds of operating expenses incurred during the process of R&D. Most of the times, these expenses are relatively smaller in sizes but sometimes they also go up to billions of dollars for big corporations.
Many R&D expenditures provide benefits to the companies for less than a year; however, many R&D activities provide the economic benefits for more than one periods. The duration of economic benefits from a R&D activity are dependent on the nature of company and research conducted.
R&D expenses are mostly higher for industrial, technological, healthcare and pharmaceutical firms. Many companies reinvest some portion of its benefits back into R&D, to get continued growth and continuous improvement in its products.
These are some examples of R&D in technological industries; in technological industry R&D is used for creating ideas for new products or updating the old ones (Damodaran, 1999).The Impact of capitalising research and development
It is very important for any technological firm to get updated timely and come up with the innovation because technology keeps changing and it is necessary for any technological firm to incorporate those desired changes timely as consumers’ needs are changing very rapidly over the years especially for the technological companies.
Many big technological firms spend their major part of expenses on R&D such as Apple invests large part of its earnings as R&D so that it is able to beat its competitors in a better way. From the analysis of technological industry it can be analyzed that most of the firms in high tech industries realize the worth of R&D investment and only those firms have survived in these industries in the long run (Damodaran, 1999).
Importance of R&D for Technological Companies
In the view of Ding, Stolowy and Tenenhaus (2007), R&D plays very important role in the technological industry as it helps the companies develop the new product ideas which lead to development of new products in the end.
It is an investment in technology and future potentials which is transformed into new products, processes, and services. Different firm’s majorly industrial, pharmaceutical and technological firms were using their major part of budget on R&D. According to Shi (2003), R&D is very important for technological firms because of the continuous changes in technology and changes that occur frequently in customers preferences.
An innovation and continuous change in technology is very much necessary for technological firms to get a competitive edge over its competitors. It is further stated that without R&D expenditure in the appropriate area, it is impossible to come up with innovation in the technological industry.
R&D gathers more and more information for the companies and by using that information companies can come up with new and innovative products to get a competitive advantage in different areas (Shi, 2003).
In the view of Damodaran (1999), another usage of that information is that it allows to make changes in their old products as per the areas suggested by R&D team.
R&D is also important to get the changes in the operations procedure to make it new and different to get an advantage than the competitors; sometimes R&D is conducted to align the practices of the company with the practices in the market / industry as the compliance with industry is important.
This discussion clearly highlights that R&D is also important for customer advantages because it helps companies to gather information about customer’s preferences with change in time and can modify the products accordingly.
It is supported by many researchers that R&D is very important for technological firms, because of innovation. The researchers suggest that it is very important …
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