However, whether success is 100 percent likely or only 2 percent, no asset are reported on the balance sheet for these costs.Because all amounts spent on research and development are expensed automatically, are the assets reported by companies in industries such as technology and pharmaceuticals not omitting many of their most valuable future benefits? If a company spends $5 billion to develop a new drug or electronic device that becomes worth $8 billion, does reporting absolutely no asset make sense? Answer: Even a student in an introductory accounting course can quickly recognize the problems created by a rule requiring that all research and development costs be expensed as incurred. Technology, pharmaceutical, and many other companies must exclude items of significant value from their balance sheets by following U.S. While this approach is conservative, consistent, and allows for comparability, the rationale is confusing. The balance sheet hardly paints a fair portrait of the underlying organization. Expensing research and development costs also violates the matching principle. These expenditures are made in the hopes of generating future revenues but the expense is recorded immediately.
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Assume, instead, that the company offers to pay this $1 million but not until five years have passed. The seller agrees to that proposal. The purchase is made now but payment is delayed. Is the $1 million still being paid solely for the patent? Does the entire $1 million reflect the historical cost of this intangible? What reporting is appropriate if an asset such as a patent, building, or land is bought but payment will not take place for several years? How is historical cost determined? Answer: Approximately forty years ago, the authoritative accounting body at the time ruled that when cash is paid for a purchase [1] over an extended period of time in the future, there are always two distinct reasons for the payments. [2] The first is obviously the acquisition of the property such as the patent in this example. The second is interest. Interest is the charge for the use of money over time. It was held to be unreasonable to believe that cash payments could be spread over several years without some interest charge being factored into the negotiated amounts. The accounting here is based on that assertion.
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