Question

respond to this discussion 2 parapgraph

Week #2 Discussion Subscribe Generally Accepted Accounting Principles (GAAP) require that R&D costs be treated as an expense as the R&D is incurred. In the pharmaceutical industry, this is generally over a period of many years in which no revenue from a drug is earned. When the drug is finally commercialized and revenues are earned, most of the R&D has been completed. This doesn't seem to comply with the matching principle of accounting which requires that revenues and expenses be matched. Does this distort to profit of pharmaceutical companies? Does it make them look more profitable than they really are?

Answer 1

Expenditures on R&D are investments to generate future revenues from drugs, so are assets whose historical costs ideally should be placed on the balance sheet and amortized over time against revenues from selling the drugs. Expensing the expenditures immediately results in mismatching: revenues from drugs developed in the past are charged with costs associated with future revenues.   However, the benefits of R&D are uncertain. Accountants therefore apply the reliability criterion and do not recognize the asset. Effectively GAAP treats R&D expenditures as a loss.