Question

(Accounting for Research and Development Costs)

Czeslaw Corporation's research and development department has an idea for a project it believes will culminate in a new product that would be very profitable for the company. Because the project will be very expensive, the department requests approval from the company's controller, Jeff Reid.

Reid recognizes that corporate profits have been down lately and is hesitant to approve a project that will incur significant expenses that cannot be capitalized due to the requirements of the authoritative literature. He knows that if they hire an outside firm that does the work and obtains a patent for the process, Czeslaw Corporation can purchase the patent from the outside firm and record the expenditure as an asset. Reid knows that the company's own R&D department is first-rate, and he is confident they can do the work well.

Instructions

Answer the following questions.

(a)  

Who are the stakeholders in this situation?

(b)  

What are the ethical issues involved?

(c)  

What should Reid do?

Answer 1

a) In this situation the stakeholders are :

Employees,

Creditors

Investors/ shareholders of the company.

Investors and creditors are concerned about the dividends, profits and cash flows of the company and the employees are concerned about their job security.

b) Ethical issues involved include

Concern for job security for the employees in the research and development department,

Loyalty to fellow colleagues and employees of Czeslaw Corporation who might lose their jobs,

Making decisions regarding long term versus short term profit for the company and a smooth and efficient operation of the company as a whole.

c) Jeff Reid, the controller of the company should do what is best for the company, Czeslaw Corporation in the long run. He should choose to have the project done where the work will be done competently and at the lowest possible cost. Research and developments costs should be shown in the financial statements as per the given accounting standards. As Czeslaw Corporation purchase patent from outside firm, accounting for a patent is the same as for any other intangible asset, that is, initial asset cost recorded at the cost to acquire the patent, amortization- charging the cost of patent to expenses over the useful life of the patent, and consequently impairment and derecognition once the patent no longer provides value to the company.