Understanding Research and Development in Accounting Practices

Case 10-4 1 Case 10-4: Research and Development Samuel Parsons School of Business, Liberty University Author Note Samuel Parsons I have no known conflict of interest to disclose. Samuel Parsons separsons@gmail.com

Case 10-4 2 According to the Statement of Financial Accounting Standards No. 2, research is defined as a “critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about a significant improvement to an existing product or process.” (FASB, 1974) With this understanding in mind, the point of research is to create an idea to start. Then, expand on that idea until it becomes a theory. Without research, many theories wouldn’t would be simple ideas that were thought of at one point. Now, Statement of Financial Accounting Standards No. 2 states that development is “the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.” (FASB, 1974) There are many stages of development; but ultimately, the development phases are meant to put theory into practice. Many attempts must be made until success can be achieved and each failure adds to research to help improve the discussed theories. When it comes to research and development for accounting and reporting practices, conceptual reasons must be used for R&D Costs. One of those reasons would to reduce the amount of details needed, but it still provide useful financial information to where nothing is excluded. Business entities would greatly favor less tedious reporting methods, especially when it comes to figuring out what money is available for expanding. “In today's world where competition is intense and continuous change is needed, enterprises can be distinguished from their competitors by institutionalization.” (Aydin and Zan, 2019) With this goal in mind, the FASB must be aware of the high-level of uncertainty that comes from reporting only useful information in R&D costs. That is why FASB must be clear and define what is useful information. Otherwise, many business entities would seek a loophole and cheat the system.

Case 10-4 3 For the Thomas Company, they should report the various costs on the Balance Sheets as follows. Since they had $500,000 in equipment with a useful life of ten years, approximately $200,000 is specifically meant for design and development. (Schroeder, Clark, and Cathey, 2009) With this in mind, this should be categorized under expenses as incurred research and development costs. “The remaining $300,000 will be used to manufacture the product once it is in commercial production.” (Schroeder, Clark, and Cathey, 2009) This amount should be capitalized at its full cost on the balance sheet once it is in the production phase. For this case, the passage of 2 Timothy 3:16-17 seems applicable to this situation. The passage states that “all Scripture is breathed out by God and profitable for teaching, for reproof, for correction, and for training in righteousness, that the man of God may be complete, equipped for every good work.” (ESV) While the Scriptures itself isn’t for correcting, but it is for correcting man’s sinful behavior. As Christians, we must research, stumble, and fail again and again to help sharpen our skills against those who seek to dull us. With all things of man, it is a continuous change and improvement from all forms of research and development. The moment we stop learning is the moment we stop being equipped for every good work.

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Case 10-4 4 References Standard Board, F. A. (1974). Statement of Financial Accounting Standards No. 2 . Financial Accounting Standard Board. https://www.fasb.org/page/ShowPdf?path=fas2.pdf&title=FAS %202%20(AS%20ISSUED) AYDIN, Ç. Ö., & ZAN, F. T. (2019, December 1). Institutionalization: A conceptual review – DOAJ . Alınteri sosyal bilimler dergisi. https://doaj.org/article/a14921229420459c8276f3c4da7970ba 2 Timothy 3:16-17 . 2 timothy 3:16-17 ESV - - Bible Gateway. (n.d.). https://www.biblegateway.com/passage/?search=2%2BTimothy%2B3%3A16-17&version=ESV Schroeder, R. G., Schroeder, R. G., Clark, M., & Cathey, J. M. (2009). Accounting theory and analysis: Text and cases . John Wiley & Sons.

Case 10-4 Research and Development

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