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ABSTRACT
In this paper we will consider the accounting treatment for research and development under IFRS. Accounting for research and development has been a subject of particular controversy internationally. IFRS does not contain any specific regulations for accounting treatment of research and development activities. Instead, the general regulations relating to reporting intangible assets are to be applied in this case. The main aim of the study is to examine accounting for research and development in IFRS era. In order to ascertain this, four research questions were formulated, and two hypotheses were tested using regression analysis. The study uses both primary and secondary sources of data, the primary source of data obtained through questionnaire using 67 accountants and auditors. The study reveals that IFRS adoption has impact on Research and Development. It was concluded that the accounting treatment of intangible assets has caused great difficulties and confusions over the years. Therefore, recommended among others that a train the trainee programme should be provided so as to be exposed to the trend of IFRS.
Table of Content
Declaration
Certification
Dedication
Acknowledgement
Abstract
Table of content
Chapter one
1.1 Background of thee study
1.2 Statement of the problem
1.3 Objectives of the study
1.4 Research questions
1.5 Research hypothesis
1.6 Significance of the study
1.7 Scope of the study
1.8 Limitations of the study
1.9 Definition of terms
Chapter two
2.1 An overview of accounting for research and development in ifrs
2.2.1 Research and development cost
2.2.2 Elements of cost to be identified with research and development activities
CHAPTER FIVE
5.1 Summary of findings
5.2 Conclusion
5.3 Reccommendation
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Accounting for research and development under IFRS presents a number of information system and process challenges. Companies should prepare to deal with technical issues, such as testing and integration of new software and hardware, but also with human resource issues, as employees adapt to the new rules and processes designed to capture activity and cost information in greater detail.
For a typical research and development life cycle, IFRS differentiates between the research element and development element. Cost considered research related are expensed as incurred; cost related to development are expensed until the creation of intangible assets commenced. This accounting method has been well accepted and is neither common nor preferred. Little progress has been achieved towards convergence on this issue.
This study also establishes standards of financial accounting and reporting for research and development with the objectives of reducing the number of alternative accounting reporting practices presently followed and providing financial information about research and development.
Specifically, our focus in this study of accounting for research and development, which creates one of the most significant differences between US GAAP and IFRS: while GAAP mandates the immediate expensing of all internal research and development outlays, IFRS calls for the capitalization of development costs, under certain circumstances. Indeed research and development capitalization is quite prevalent among IFRS using research and development intensive firms: 40% of our IFRS sample firms capitalize development costs.
Thus, IFRS standard for research and development capitalization (IAS 38) requires adopters to generate substantial investment-relevant information, mostly of the type of strategic consideration analysis try to elicit from managers with conference calls. We choose to focus on research and development intensive firms not only because the accounting for research and development differs markedly between GAAP and IFRS, but also because constant technological changes and considerable scientific complexity of the business models of high tech and science-based firms create particularly large information which make it difficult, sometimes even impossible, for investors to reliably access the performance and financial condition of these firms.
This study specifies;
- Those activities that shall be classified as research and development for financial accounting purposes.
- The elements that shall be identified with research and development activities.
- The financial statement related to research and development.
1.2 STATEMENT OF THE PROBLEM
The basic problem with accounting for research and development under IFRS era is that future benefits associated with these expenditure are sufficiently uncertain, that it is difficult to record the expenditures as assets.
Other problems include;
- Those activities that should be recognised/identified as research and development for financial and reporting purposes.
- The disclosure of information relating to research and development.
- How the intangible assets will generate probable future economic benefits.
1.3 OBJECTIVES OF THE STUDY
- To ensure that financial statements provide useful information about research and development activities.
- To know if IFRS handles research and development cost in the same manner.
- To prescribe the accounting treatment for intangible assets.
- To reduce the number of alternative accounting and reporting practices.
1.4 RESEARCH QUESTION
- Are there degrees of research and development activity to be faced in IFRS?
- Does IFRS adoption have any impact on research and development?
- Does IFRS handle research and development cost in the same manner?
- Does anything happen to the value of intangible assets under IFRS.
1.5 RESEARCH HYPOTHESIS
H1: The adoption of IFRS has great impact on research and development.
Ho: The adoption of IFRS does not have impact on research and development.
H1: IFRS handles research and development cost in the same manner
Ho: IFRS does not handle research and development cost in the same manner.
1.6 SIGNIFICANCE OF THE STUDY
- To access the impact of IFRS on accounting for research and development activity.
- To ensure thorough understanding of the accounting guidance for research and development under IFRS.
- Evaluate and understand the research and development cycle, the business culture within the research and development organization and processes that support and capture research and development activity.
- This study will also be useful to stakeholders in such a way that it will guide them on the various methods accounting for research and development.
- This study will hopefully be useful to other researchers, in that it will add to the existing literature in the subject.
- Finally, this project will be useful to the researcher in that it is presented in partial fulfilment for the award of diploma in accounting.
1.7 SCOPE OF THE STUDY
This study covers the research and development activities in IFRS, which involves those activities that create or improve product or processes. It can also be applied in accounting for intangible assets.
1.8 LIMITATION OF THE STUDY
In a study of this nature, a lot of limitation is bound to occur. And so it will be left in the hands of the researcher to strive to achieve the least he could inspite of this limitation.
- Inadequate information was a limiting factor on the extent to which the researcher could go on this study.
- Finance was also a limitation to the study. Lack of fund required to carry out the cost of materials, typing the project and binding it.
1.9 DEFINITION OF TERMS
- ACCOUNTING: It is a practise and body of knowledge concerned primarily with methods of recording transactions, keeping financial records, performing internal audit. It is systematic method of classifying, recording, measuring, verifying, summarizing, interpreting and communicating financial information.
- RESEARCH AND DEVELOPMENT: Is a general term for activities in connection with corporate or government innovation. Research and development is a component innovation and is situated at the front end of the innovation life cycle. Research and development is of great importance in business as the level of production processes, competition and methods are rapidly increasing. It is also seen as the systematic activity combining both basic and applied research, and aimed at discovering solutions to problems.
- INTERNATIONAL FINANCIAL REPORTING STANDARD (IFRS): Is a set of accounting standards developed by an independent, not for profit organization called International Accounting Standards Board (IASB). The goal of IFRS is to provide global framework for how companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting .They are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.
- INTANGIBLE ASSETS: According to IAS38 it is “an identifiable non-monetary asset. It is a resource which is controlled by an entity as a result of past events and from which economic benefits are expected to flow in Future. Corporate intellectual property, including items such as patents, trademarks, copyrights and business methodology are all intangible assets, as well as goodwill and brand recognition.
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