Question

In US GAAP, expenditures for advertising and research and development (R&D) are recorded as expenses. However, it can be argued that spending on advertising and R&D are actually investments that are expected to lead to future products and sales revenue. From that perspective, such expenditures should be recorded as assets.

Required:

Using terms from the FASB’s Conceptual Framework, briefly discuss whether the accounting for advertising and R&D are consistent with the Conceptual Framework or not. You are welcome to adopt either position. The most important part of your answer is how you demonstrate your understanding of the Conceptual Framework through the argument that you make to support your position.

Answer 1

According to the FASB conceptual framework, expenses incurred for advertisement and research and development (R&D) are treated as an expense in the year they have incurred and not to be capitalised.

The US GAAP Accounting Standards - Codification topic 730: "Accounting for Research and Development costs" the general rule for research and development costs are charged to expenses when incurred because the future economic benefits are uncertain. The Research and Development costs include tangible assets, intangible assets, indirect costs, computer software costs, etc. All costs relating to tangible and intangible assets which are used for future alternative uses can be capitalised otherwise not. Indirect costs are expensed when incurred. Computer software costs when software developed internally for R&D costs is expensed. But software which has future alternative uses can be capitalised.

The accounting treatment for Advertisement and R&D are not consistent with conceptual framework. However if the entity is of the opinion that it is an investment made to generate more revenue then it can be capitalised. For the expense to be capitalised or not depends upon what type of expense it is and certainty of future economic benefits. Ultimately the burden of proof depends upon the company in measuring the future economic benefits. It is not an easy task to measure reliably the future economic benefits. This is the reason why most companies choose not to capitalise the expenses because the future economic benefits are uncertain.

According to the US GAAP or FASB conceptual framework, these expenses are treated as expense. However certain expenses can be capitalised. But it is advised to follow the recommendations of the acts in providing rightful information to the user of financial statements.