Discuss about the Accounting Theory and Current Feeds Issues.
The case is pertaining to a bio research firm of Australian named Bio-Sustainable feeds (BSF Ltd). The firm is listed on the Australian stock exchange (ASX). For last two decades, the firm has been engaged on the research concerned with sustainable aqua-culture feeds.
With an average rate of around 8 to 10 percent, rapid expansion in the aquaculture has been noticed. During the year 1980 to 2010, there had been increase in the contribution of the aquaculture in arena of global fishery output. In addition to that increase in the artificial feed was also evidenced. As per the view of analysts, aquaculture has potential to offer around 23 million tons of aquatic food (Sarker, Kapuscinski, Lanois, Livesey, Bernhard, & Coley, 2016).
Aqua culture is farming of aquatic plants, and aquatic animals. The term sustainable aqua culture can be construed as the cultivation of aquatic organism. Sustainability word is used often in the context of aquaculture. The main aim of the same is to do away with the negative environmental impact on the society. The practice is adopted for the commercial purpose by the companies for generating higher economic profits. Feed are either in form of pellets or granules offering nutrition in concentrated and stable form. It allows the fishes to grow to its full potential and to feed them in an efficient manner (CBC news, 2016).
The company has undertaken research on the plant based soybean, sunflower, Canola, Corn like plant based feeds for whopping $ 360 million AUD. It failed creating huge losses for the company. There were so many problems faced by the company in fish based feed. Conversion rate, growing time, and maturity were some of the issues related to the case.
The underlying project will be throwing light on some of the above mentioned issues along with commenting on the decisions made by the firm.
The research conducted by the BSF Ltd is pertaining to the aquaculture and holds enormous importance. Fish feed research is of utmost importance to the entire world as it can contribute in reducing the hunger of people of world. It is an effort of the BSF Ltd. to make fish farming more sustainable.
The research of the BSF Ltd. was revolving around the sustainable feeds wherein the aim of the company was to not cause harm to the society. The BSF Ltd Company was in favor of resorting to the bacteria for the purpose of fish feeds production. Residues of sugar cane, wood chips, and methane gas emanating from plants of food processing, dumps, sewages, were some of the options available on which the company was pondering over.
From the point of view of the society, the research is supposed to have huge importance as the research will be expediting in solving the food problems prevalent in the world and on the issue of sustainability simultaneously.
However, plant feed is causing harm to the fish being a anti nutrient. Digestive system, health and growth of the fish are affected. These substances can make structure and skeleton of the fishes so soft which is not desired. It can be unpalatable for the fish owing to bitter taste.
The BSF Ltd. had been facing many issues in the aqua cultural feed based project. All the issues were compounded by the environmentalist too for causing harm to the poor and widening the gap between rich and poor.
Some of the problems or issues are mentioned as follows:
Apart from that huge costs and accusations from the environmentalists were also adding up to the issues being faced by the BSF ltd. Co. Company received grant from CSIRO of whopping $ 500 million which was not sufficient and was spent before the research was completed.
Research and development is related to finding out the solution of the problems and inventing new products or processes. It gives the right to the researcher to get patent over the process or the products.
Research and development can be termed as the two faces of a coin which are inseparable. Research and development are to be taken into consideration with the intent of making country developed and successful. In many of the countries, the formulation and implementation of policies is not up to date due to the inadequate facilities (Namanji & Ssekyewa, 2012).
Figure 1: Difference between research and development (Rdmag, 2015)
It is not easy to differentiate between the research and development owing to inseparable aspect of two. It can be understood as the basic research, and applied research, advanced development and product development. These four can be called as the segments of research and development. Basic research identifies the inventions that can work, while applied research is helping in narrowing down the possible solutions. Advanced development is advanced research reducing the risk of the projects. Product development is producing entirely new product in market. Nevertheless, all the categories overlap each other (Rdmag, 2015).
The costs pertaining to the research and development activities are not shown in the intangible assets under the balance sheet head. The costs associated with the research and development activities are termed as an expense incurred for developing a patent. Thus it is deemed as the internal cost of developing (Boundless, 2016).
The amount of research and development cannot be measured exactly as it is to be incurred in future. There is no clarity regarding the costs associated as happened in the case of BSF ltd. The company was granted $500 million from CSIRO which was spent initially.
Firms get engaged in the activities of research and development. Many a time’s research and development activities are driven by the market forces. Private firms are having incentives for conducting the activities of research and development. It is not necessary that all the firms engaged in the practice of research and development will get success. Research and development spillovers are also prevalent in market whereby one firm does the research and other firm can use its research (katz, 1986). The research and development on the large scale contribute towards the economic growth and development of the country (Griliches, 1979).
Technology innovations are very important for an organization to survive profitably in this dynamic and competitive market scenario. This is the reason companies have to conduct intense R&D activities to find technological advancements. For this, a large amount of money is spent. If they find some new way of value addition to customers, they would like to use that method exclusively in their premises. For this, companies own intellectual property assets like patents, copyrights, etc. (Cornish, Llewelyn, & Aplin, 2013). These are recorded on non- current assets side of the statement of financial position of the companies. Being an asset of the company, they need to be valued periodically and their fair market value should be recorded in books of accounts to avoid any window dressing in financial statements. They are also sometimes mortgaged for acquiring loans. This is also one of the prominent reasons for which fair market valuation of patents is required on the part of accounts division of companies. It is very crucial for companies to ascertain fair economic value of intellectual property rights so that their trading norms can be defined. Fair market value of a patent refers to the valuation of intellectual property as per the rate at which it can be sold in the market (Kossovsky, 2002).
There are some assumptions which should be considered thoroughly while calculating such values. They are discussed below in detail (Jaffe & Trajtenberg, 2002).
First of all, it is important to know the situations where it is mandatory to calculate fair market value of patents. Situations like mergers/ acquisitions; board requirements to know patent valuation; a lawsuit where a firm’s patent is being violated by a competitor, etc. call the need for patent valuation.
It is mandatory for companies to disclose all the patents and their fair market value in the event of acquisition/ takeover. The reason is that valuation of intangibles along with tangibles is assumed to give accurate worth of the company.
In situations of infringement of patents’ rights, it is necessary for the company to calculate fair market valuation of those patents so that the competitor who has cheated can be claimed in a lawsuit for the loss of income. It is assumed that the company has incurred loss due to the violation of patenting rights.
The calculations for the fair market value are based on the concept of time value of money. It is demonstrated below in context of BSF Ltd. who has patented their technology of bacteria- based feeds for using it exclusively in their premises. After all, they have incurred $700 million on research and development for the purpose. It will not be in the best interest of the company that this technology will be used by others who have not spent anything on R&D.
The company’s patents are expected to have a net market value of $700 million, if they are sold after two years. This is the future value of patents. The discount rate to be used in this type of project is given as 8.0% per annum. So, the present value of this patent, i.e. today’s fair market value of patent will be calculated as follows.
NPV = FV * (1/ 1+ i) ^ n.
Here, NPV represents net present value of patents; FV stands for future value of patents; i stand for interest rate and n denotes number of years for which the value is discounted.
Therefore, NPV= $700 million * (1/ 1.08) ^ 2 = $600.14 million.
It is also given that if the patents are not sold after two years; and they are produced & held by the company to be sold after 10 years, then their fair market value after 10 years will be different. It is expected to give a valuation of $200 million every year. So, these will be calculated using a series of amounts or annuities.
FV= equal amount of every year * [{(1+ i) ^ n}-1]/ i.
FV= $200 million * {(1.0810– 1)/ 0.08} = $2,897 million.
(Oehmke, 2000)
Journal Entries for the Research and Development Transactions
|
Date |
Particulars |
AUD $ |
AUD $ |
|
|
2012-13 |
Grant from Commonwealth Scientific and Industrial Research Organization (CSIRO) A/c To Bio Sustainable Feeds (BSF) LTD. |
Dr. |
500 million |
|
|
500 million |
||||
|
2012-13 |
Expenses on Alternative Aquaculture Feeds A/c To Cash A/c |
Dr. |
100 million |
|
|
100 million |
||||
|
2013-14 |
Research A/c To Cash A/c |
Dr. |
500 million |
|
|
500 million |
||||
|
2014-15 |
Development A/c To Cash A/c |
Dr. |
200 million |
|
|
200 million |
||||
|
2015-16 |
Development A/c To Cash A/c |
Dr. |
200 million |
|
|
200 million |
An affirmation has come from the desk of management team of BSF Ltd. regarding their decision to get the technology patented which is innovated by their research team to be used exclusively for their company. In the company’s prospectus, it has been mentioned that they have an exclusive control over the technology by way of patents. Now this is to be ascertained that to what extent, the assertion given by the company is reasonable as per its present and future requirements.
Research says that having intellectual property rights is always a good option to gain a competitive edge over other market players of the company. Promising inventions and innovations must be patented or taken a copyright of (Blind, Edler, Frietsch, & Schmoch, 2006). It is reasonable and quite crucial for BSF Ltd. because if they had not taken the intellectual property right over the technology they have invented, it will be copied easily by competitors. This will give no advantage to the company for spending millions on research and development. Actually it is vicious cycle which will hamper the innovation of entire industry. Had there not been grounds for patents or copyrights, everyone would like to wait for the other to invest in R&D and get it copied for their own use. With this thought- process, there will be no innovation and R&D prospects in the country (Encaoua, Guellec, & Martinez, 2006). Secondly, if intellectual property rights are not there, then no one will invest their money in the company who still wants to carry research and development. Seeing all these facets, it is clear that the company’s decision to get its technology patented was reasonable. However, they have to incur costs to produce that patent in the form of fees given but it will give them a competitive edge in the market. This is what we call as the first mover advantage (Agarwal & Gort, 2001).
So, at the end of the day, whether the company has invested $700 million in research and development and few more in obtaining intellectual property rights, it will receive sweet fruits out of this. Conclusively, it can be said that patenting is a long, uncertain and expensive procedure but it will help in adding value to company’s prospects in long- term (Blind, Cremers, & Mueller, The influence of strategic patenting on companies’ patent portfolios, 2009).
References
Agarwal, R., & Gort, M. (2001). Firstâ€ÂMover Advantage and the Speed of Competitive Entry, 1887–1986. Journal of Law and Economics, 44(1), 161-177.
Blind, K., Cremers, K., & Mueller, E. (2009). The influence of strategic patenting on companies’ patent portfolios. Research Policy, 38(2), 428-436.
Blind, K., Edler, J., Frietsch, R., & Schmoch, U. (2006). Motives to patent: Empirical evidence from Germany. . Research Policy, 35(5), 655-672.
Boundless. (2016). Accounting for R&D Activity. Retrieved 2016, from www.boundless.com: https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/controlling-and-reporting-of-intangible-assets-7/research-development-cost-53/accounting-for-r-d-activity-269-3723/
CBC news. (2016). Shift to plant-based fish feed could hurt health, environment. CBC news.
Cornish, W., Llewelyn, G. I., & Aplin, T. (2013). Intellectual property: patents, copyright, trade marks & allied rights.
Encaoua, D., Guellec, D., & Martinez, C. (2006). Patent systems for encouraging innovation: Lessons from economic analysis. Research policy, 35(9), 1423-1440.
Griliches, Z. (1979). Issues in Assessing the Contribution of Research and Development to Productivity Growth. The Bell Journal of Economics, 10(1), 92-116.
Jaffe, A. B., & Trajtenberg, M. (2002). Patents, citations, and innovations: A window on the knowledge economy. MIT press.
katz, M. K. (1986). An Anaysis of cooperative research and development. Rand Journal of Economics, 17(4), 527-543.
Kossovsky, N. (2002). Fair value of intellectual property: An options-based valuation of nearly 8,000 intellectual property assets. Journal of Intellectual Capital, 3(1), 62-70.
Namanji, S., & Ssekyewa, C. (2012). Role and Nature of Research in Development. Makerere Journal of Higher Education, 4(1).
NMBU. (2013). Fish feed-research may help reduce world hunger. Norwegian University of Life Sciences.
Oehmke, J. F. (2000). Anomalies in net present value calculations. Economics Letters, 67(3), 349-351.
Rdmag. (2015). The Difference Between Research and Development. Rdmag.
Sarker, P. K., Kapuscinski, A. R., Lanois, A. J., Livesey, E. D., Bernhard, K. P., & Coley, M. L. (2016). Towards Sustainable Aquafeeds: Complete Substitution of Fish Oil with Marine Microalga Schizochytrium sp. Improves Growth and Fatty Acid Deposition in Juvenile Nile Tilapia (Oreochromis niloticus). PLOS, 11(6).
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