Report on intangibles and the R&D capitalisation debate

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15 Feb 2019

Many have noted the increasing gap between the values of companies based on their share price and the tangible asset values in their financial statements. One of the major components of this gap are the ‘intangibles’ that are recognised as valuable by the market but are not recognised as assets by financial reporting.

These intangibles may include the value of the workforce, knowhow, customer relationships, brands and a pipeline of new products. IFRSs only allow for a restricted recognition of these assets, hence the gap. Many intangibles will be assets if purchased directly or as part of an acquisition. Of internal spend, the development costs of new products or processes meeting six criteria (about the likelihood that the project will achieve commercial returns) specified in IAS 38 Intangible Assets must be recognised as assets. Whether those criteria are met can be a matter of judgement giving management considerable scope to decide whether they prefer to expense these costs as incurred or to capitalise them.

A new report The capitalisation debate: R&D expenditure, disclosure content and quantity and stakeholder views provides comprehensive evidence of the current state of accounting for research and developments (R&D) by IFRS reporters and some of the factors that may lie behind it. Please click to read the full report.

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