Question

in millions of euros Research and development expenditures of which: Development costs capitalized from annual income statements: Pretax profit under IFRS from yearend balance sheets: Total assets under IFRS from annual statements of cash flow: Operating cash flow under IFRS Year 1 Year 2 Year 3 2,500 3,000 3,600 1,000 1,240 1,300 .400 9,800 9,500 78,000 80,000 84,000 5,000 5,300 4,800 As a starting point, you have reviewed descriptions of Remy's R&D activities and concluded that all R&D expenditures would be expensed as incurred under U.S. GAAP Your team leader has told you to make the following additional assumptions to simplify your analysis: All R&D expenditures occur on the last day of the fiscal year Capitalized development costs have a 2-year useful life. Products resulting from capitalized development costs are released to the market on the first day of the subsequent fiscal year. For instance, if 100 is capitalized as a development cost asset on December 31, amortization of the development cost asset begins the next day, on January 1 of the following year. Apart from capitalizing development costs, all of Remy's other accounting policies conform to U.S. GAAP Required: a. Under the foregoing assumptions, how much pretax profit would Remy Corporation have recorded under U.S. GAAP in Year 3 b. Remy Corporation's fiscal year ends on December 31. Compute the value of total assets under U.S. GAAP as of December 31, Year 3. c Compute Remy Corporation's operating cash flow under U.S. GAAP for Year 3

Answer 1

Under United States Generally Accepted Accounting Principles (GAAP), companies are obligated to expense Research and Development (R&D) expenditures in the same fiscal year they are spent. This often creates a lot of volatility in profits (or losses) for many companies, as well as in measuring their rates of return on assets and investments. A lack of R&D capitalization could mean that their total assets or their total invested capital do not properly reflect the amount that has been invested into them. As a result, there can be an impact on the company’s Return on Assets (ROA) and Return on Invested Capital (ROIC)

research spending is treated as an expense each year, development costs are able to be capitalized if the company can prove that the asset in development will become commercially viable (meaning the technology or product in development is likely to make it through the approval process and generate revenue).

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