Activities that generate or enhance goods or processes are included in the accounting for research and development (Mazzi et al., 2019). The main issue for businesses is that research and development (R&D) expenses cannot be capitalized since their future benefits are unlikely to be realized (Ertuğrul, 2020). Several nations’ accounting regulations mandate that businesses expense all R&D costs as they are incurred. Because of this, before making an international investment, one should do a lot of study on the tax laws of the destination nation.
Accounting treatment of R&D expenditure in the UK
While being classified as an intangible asset, research and development (R&D) accounting in the UK is controlled by SSAP 13, Accounting for Research and Development. Capitalizing on such expenses does not adhere to the accrual approach under this accounting standard since spending on research and development does not necessarily yield future economic advantages (Zhu et al., 2022). Due to this, the business’s R&D expenses would be recorded as incurred in the profit and loss statement. The advantage of this R&D treatment is that NovoMed Limited will have the choice to postpone the development expenditure and carry it forward as an intangible asset, provided the project is clearly defined, the expenditure is clearly identifiable, and the project is technically and commercially feasible. However, this accounting standard’s weakness is that it does not correspond to new international accounting standards. Companies that desire to capitalize on development expenditures may attempt to manipulate the option by creating discrepancies amongst themselves as a result of the allowance for choice in capitalization (Wouters et al., 2020).
Accounting treatment of R&D expenditure in the US
R&D treatment in the United States is contained under the TCJA – Tax Cuts and Jobs Act – which allows the company to amortize R&D costs over a period of five years, starting from the midpoint of the taxable year in which the expenses occur (Owino & Nixon, 2021). For research conducted outside of the US, the amortization period is 15 years. The strength of this R&D treatment is that a company in a loss position is able to get the full benefit by carrying forward the deductions into future years where they could get a deduction. The weakness of this R&D treatment is that it NovoMed will have increased investment costs which will discourage R&D and thus reduce the company’s economic output. The R&D treatment also results in increased complexity of the tax code as the company will be required to track one more set of deductions over the years (Ertuğrul, 2020).
Accounting treatment of R&D expenditure in China
According to Saeed et al. (2023), the government of China, in its effort to transit from a low-end mass manufacturer to a high-end producer, has increased its support for technological innovations and support for targeted R&D expenditure. The technology industry has recently been identified as strategic in China, where the government’s backing has expanded. In China, technology-based SMEs benefit from a super deduction policy for R&D costs, where 100% of the R&D expenses are deducted from the taxable income based on actual deduction (Bai et al., 2023). The advantage of this R&D structure is that while costs are often 100% deductible for determining corporate income tax taxable income, the expenses are still subject to a deduction ceiling. Its R&D treatment’s limitation to manufacturing technology-based SMEs makes it a shortcoming.
Accounting treatment of R&D expenditure in Australia
In Australia, NovoMed will be entitled to a refundable R&D tax incentive depending on the company’s turnover and its eligibility for R&D expenditure. Credit is recognized in profit before tax to match the benefit it intends to compensate (Yamada & Nakayama, 2019). The accounting treatment of R&D expenditure varies on whether tax offset is refundable or non-refundable. Consequently, the offset does not form part of income tax but rather in the form of a government grant (Mališ & Brozović, 2021). The strength of this R&D expenditure treatment is that refundable offsets are received based on R&D spent regardless of the entity earning taxable income. This accounting treatment gives different investors different terms, which could result in favoring local investors over foreign investors.
Based on the analysis of the accounting treatment of R&D expenditure in the four countries, China is the most suitable country for NovoMed Limited to invest in. China recognizes technological innovations in the manufacturing sector. NovoMed is a medicine manufacturer intending to innovate its production in a technological way. Investing in China will have the company’s R&D expenditure deducted in full. Moreover, the government of China offers exclusive support for technological-based SMEs; thus, NovoMed, an expanding company, is bound to enjoy this benefit.
Accounting treatment for R&D expenditure is one of the major considerations that a firm should make before deciding to invest abroad or expand local businesses. In addition to international standards, most nations have their accounting procedures for R&D expenses. R&D accounting data is helpful to investors in the decision-making process and supports the idea of the mandated capitalization of development expenses, provided certain requirements are met. The disclosure of intangibles can greatly enhance the financial data that users of financial reports receive.
Bai, S., Koong, K. S., & Wang, Y. (2023). Research and development reporting and stock performance: evidence from China. International Journal of Accounting & Information Management, (ahead-of-print).
Ertuğrul, M. (2020). The impact of research and development expenditures on the value relevance of accounting items. Strategic priorities in competitive environments: Multidimensional approaches for business success, 41–67.
Mališ, S. S., & Brozović, M. (2021, May). Research and development: accounting perspective and issues. In 2021 IEEE Technology & Engineering Management Conference-Europe (TEMSCON-EUR) (pp. 1-8). IEEE.
Mazzi, F., Slack, R., Tsalavoutas, I., & Tsoligkas, F. (2019). Country-level corruption and accounting choice: Research & development capitalization under IFRS. The British Accounting Review, 51(5), 100821.
Owino, M., & Nixon, O. (2021). Accounting Treatment of Research and Development Expenditure: A Critical Literature Review. International Journal of Accounting, Finance and Risk Management, 6(2), 36–45.
Saeed, A., Haq, Z. U., & Iqbal, J. (2023). Investigating the Factors Affecting Research and Development Expenditure Efficiency in China and India. Journal of the Knowledge Economy, 1-11.
Wouters, O. J., McKee, M., & Luyten, J. (2020). Estimated research and development investment needed to bring a new medicine to market, 2009-2018. Jama, 323(9), 844-853.
Yamada, H., & Nakayama, Y. (2019). Empirical Research on the Profitability of R&D Expenditure: Estimations Based on Firm-level Accounting Data in the Japanese Textile Industry. International Journal of Systems and Service-Oriented Engineering (IJSSOE), 9(1), 20-41.
Zhu, Y., Wang, L., Zhang, B., & Li, S. (2022). A Comparative Research on the Capitalization and Expense Accounting of Enterprise R&D Expenditures. Advances in Economics and Management Research, 2(1), 135–135.