Research and development: accounting perspective and issues

Accounting treatment of research and development (R&D) costs has been the subject of debate and disagreement for decades, with no solution or regulatory harmonization in sight. The reasons do not lie in the treatment of research costs, because everyone agrees that the future economic benefits behind these costs are too uncertain and that they should be treated as an expense. However, costs of development create quarrels. Standard setters cannot agree on whether they should be capitalized or presented as an expense. It is interesting that, regardless of the prescribed accounting treatment, there is criticism for the existing approach and advocacy for the opposite approach. This is because both approaches have their drawbacks. In addition to exploring how R&D expenditures are defined and measured, we focus on investigating accounting treatment of R&D in different sets of standards. Since treatment of R&D costs is subject to criticism, we further investigate the issues and misuses of this type of costs, primarily related to earnings management. In the end, we illustrate how different accounting treatment affects company's financial stability and performance.