Under IAS 38 Intangible Belongings, the accounting treatment for research and development is different. It depends on whether the expenses is incurred from research or development. Within the Ruritanian Accounting Standard, research costs is costed to the statement of complete income and development cost is to be capitalized as a part of intangible assets. Broadly speaking, it is common treatment in almost all of companies. However, this accounting treatment is not perfect. We will discuss advantages and disadvantages of the standard.
Firstly, in the Ruritanian Accounting Standard, the definition of research and development costs have been given and lay out the conditions that need to be satisfied to be able to price or capitalize. Research expenses is not related right to any of the company's products or functions whilst it conforms to a search process. In the study phase, an entity cannot illustrate that it'll become an intangible property and generate probable future benefits. Otherwise, expenditure is recognized as development costs as an intangible advantage. It is a similar description in the IAS 38. However, the actions related to research and development but are not included neither research nor development period are not categorized in the typical. There's a situation been around in the research and development process, for example, troubleshooting in connection with breakdowns during commercial development. IAS 38 does not provide a instruction of the activities but apparently it would be useful in deciding whether costs can be capitalized under the rules identified in the typical. Moreover, expenditure cannot be classified into both of these categories because of the complex dynamics of new equipment programmes, it is not possible to distinguish reliably between research and development activities until relatively later in the program.
Secondly, in the early standards, development costs could be capitalized only when it will make money. IAS 38 says that profitable development costs must be capitalized whereas SSAP 13 has given your options of either capitalizing the expenses or charging as a cost. The IASB's Construction for prep and demonstration of Financial Statements says 'an advantage is accepted in the declaration of financial position when it is probable that the near future financial benefits will stream to the entity and the advantage has a cost or value that can be measured reliably'. However, in the Ruritanian Accounting Standard, we give an advice of capitalizing all the development costs as an intangible asset rather than the options. There are a few uncertainties on whether project can be completed successful and the expenses of developing the product. On almost all of the conditions, people are always optimistic when developing the product and consider it will have future gain. In practice, many problems are came across through the process and the cost is much greater than estimates before. So, the development costs can be not believed reliably till the conclusion.
Thirdly, regarding to measuring the profit, it has a difficulty in estimating future sales and future costs. After the development has completed, the sales need to be checked if the sales of the merchandise will be profitable. Two factors are related to deal value this is the selling price of every product and quantity sold. It really is doubt about those numbers. For instance, for a few high technology products, value might be high in the beginning and then will greatly decline as competition occurs. It is called marginal costs. There's a relationship between amount sold and selling price that the lower value is, the greater increase sales will be. So, it will cause the situation in estimating future costs. It really is uncertain that a product will be profitable and it'll have inaccuracies in estimating the costs. Also, it could be difficult to satisfy the standard to be an asset and should not be identified in the financial position. In short, to capitalize total development costs remain to some extent inaccuracy when the problem above occurred.
Lastly however, not the least, a new treatment will happen from purchased goodwill in an enterprise combination. The study and development part of subsidiary will be purchased and account for the intangible resources in the financial record of mother or father company. You will discover two alternatives that are impairment and amortization. In IAS 38, it amortized the trouble and impairment of intangible property by using the reducing balance method. Within the Ruritanian Accounting Standard, it is steady with IAS 38 standard. However, there is a pattern on impairment alternatively than amortization in the listed companies. Seemingly, companies want to maximum their reported profit and amortization will reduce profit. Among the significant reasons is the fact if the 'future monetary profit' of the goodwill is higher than its original cost, and therefore will avoid a fee to the income declaration. Under IAS 38 an intangible property with an indefinite life is not amortized but to incur an gross annual impairment check that your impairment is significantly less than its transporting value. It appears to be comparable to other treatment of purchased goodwill.
In summation, there are numerous advantages in the Ruritanian Accounting Standard and help to solve the main problem in the been around accounting standard. On the other hand, it eliminated some aspect inconsistent with accounting insurance policy. It is inevitable to have downsides in identify the research and development costs and whether to treat it in the finance position or income declaration. Those problems still need to be discussed in the future.