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The requirements of IAS 38 in respect of Research and Development expenditure are theoretically dubious and practically unnec - Essay Example

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The requirements of IAS 38 in respect of Research and Development expenditure are theoretically dubious and practically unnec

The entity intends to complete the intangible asset and thereafter, use and sell it. The entity has the ability to use or sell the asset. The entity can explain the ways of generating future economic benefits by means of these intangible assets. The entity has adequate financial, technical and other utilities and resources in order to use and sell the intangible asset. The entity can demonstrate its ability to determine and measure the expenditure that can be attributed to the intangible asset during its development (IFRS, 2012). However, in the recent past, the implementation of IAS 38 in respect of research and development expenditure has been under some sort of controversy. Leaders and researchers all around the world have regarded the implementation of IAS 38 in this field as being dubious and practically unnecessary. They believe that research and development expenditures should be treated as an expense and should be recorded in the income statement and its amounts should be disclosed in accordance with the accounts. This idea has formed the basis of research for this study and the following section will involve a critical evaluation of the idea explained above and its feasibility. Evaluation Over the last few years, the fact explains that, the relation between accounting and the extent of investment in activities giving rise to intangible assets has been an area of constant debates. One example of such activity includes the expenditures that arise from a research and development. The general concern that people have shown regarding this particular activity and its link with accounting is the fact that some of the expenditures create economic assets and that the extent of mandated disclosure of these expenditures within the financial statement is limited. IAS 38 requires entities to recognize expenditures on intangible assets, only if they fulfil the abovementioned criteria. The compulsory disclosure of these expenditures within the financial statements is limited. However, authors and leaders have severely discouraged this aspect of IAS 38, as they believe that these expenditures should be treated as proper expenses and should be fully disclosed in the accounting reports. This is primarily because, inappropriate accounting measurement practices characterized by the inadequate disclosure of expenditures arising from research and development activities, may lead to the failure of stock markets in fully reflecting the benefits of the R&D activities in the market value of firm (Dedman et al., 2009). The author also stated that stock markets have sometimes underestimated the value of R&D activities and thus, a proper disclosure of information related to R&D expenditures is of utmost importance. On the contrary, Lev (2008) cites Skinner’s summary which contradicts various theories suggesting the negativities associated with accounting for intangibles. The author quotes that, “there is no evidence that the accounting or disclosure treatment of intangibles in and of itself results in systematically lower valuations for these firms” (Lev, 2008, p. 209). However, the author simultaneously highlights the importance of proper disclosure of R&D expenditures in the firm’s income statement. The author explains that, firms that specialize in R&D ...Show more

Summary

Essay, Finance and Accounting Introduction The international accounting standard 38 (IAS 38) specifies the accounting rules for intangible assets that are not dealt with in other standards. The regulations specified under this standard are for entities to recognize an intangible asset only if certain criteria are fulfilled…
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The requirements of IAS 38 in respect of Research and Development expenditure are theoretically dubious and practically unnec essay example
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