Discuss about the Accounting Theory and Current Issues for Commercial World Spend.
A wide range of uncertainties is involved with the research and development expenditures identified by the firms across the different industries. The instabilities or insecurities are experienced by the businesses throughout the countries from the expected or premeditated benefits in the future stage of operations. Every organization wants to become profitable as part of conducting business activities in its respective segment of the market leading the managers to decide upon the sound investments having the capability to offer abundant returns to the company (Deegan 2013). Given the particular dilemma and hesitations faced by the firm, ‘Generally Accepted Accounting Principles (GAAP)’ has mandated that the overall expenditures incurred by the businesses regarding the research and development process should need to be treated as expenses dedicated to improving the operations. Based on the investigation performed by Deegan (2013), the chief variance is experienced by the business through the application of research and development offering assistance to the business to develop progression into the market. Such progress is highly dependent on recognising the fair value of the complete research and development process by the acquirer (Corbin and Strauss 2014).
On the other hand, a large number of business from the commercial world spend a huge sum of money on an annual basis in the research and development settings dedicated to shaping up business products and services (Patton et al. 2016). The particular example can be observed from the example of BSF Ltd in the identified case study. Cicchetti (2016) clarified that a large number of entities are engaging in the individual process with the intention of advancing their products or services facilitating the firm to generate a significant amount of revenues from its upcoming years of operation. In line with the identified concepts and facts associated with the research and development phase, this report is attempted to engender the involving prospectus and patent values related to the approaches and critical acknowledgements by the absolute undertaking.
Research is defined as a planned set of investigations, which have its originality while undertaken with the aim of obtaining scientific knowledge or technical understanding over the product and services or techniques and approaches of the business (Cicchetti 2016). The precise example can be observed through the case study explaining the research activities undertaken by BSF Ltd, a bioresearch firm listed on the Australian Stock Exchange (ASX). Based on the case study, the company is engaged in the research on sustainable aquaculture feeds for almost two decades by comprising both plant based feeds and high-value piscavorian fish. The primary objective of research is studying the unknown from its early stage to propel the economic benefits towards the favourable direction of the business. Such target is meant to provide highly anticipated growth to the entire activities and proceedings undertaken by the entity (Northouse 2015).
According to Corbin and Strauss (2014), an organization can employ a variety of business research for collecting the extended range of information regarding the current and potential degree of operations. Therefore, core outcomes of business research vary with their types, as each type of research comprise distinct nature driving them to be separated from one another. Developing a focus group of customers or conducting a consumer survey may be the effective part of the research depending on their potential requirements (Gioia, Corley, and Hamilton 2013). Patton et al. (2016) have discussed that the type of business research varies depending widely on the associated conditions of the business environment and needs of target market. Over the two decades, BSF Ltd was engaged in research with the aim of ensuring sustainability in delivering the aquaculture feeds by involving plant based feeds and fish based feeds. The particular type of research undertaken by the company is progressed by specifically including both quantitative and qualitative research approaches. From the application of the particular type of business research, various facts and numbers alongside the collection, evaluation, and interpretation of useful data based on observation and identification of critical sources (Baskerville and Wood-Harper 2016). The particular research conducted by the firm over the years had received a substantial amount of accusations from the environmentalists claiming the provided foods are diverting the quality of food crops into the growth and luxury fish. In response to such issue, the management of BSF Ltd has shifted its research to the application of bacteria for producing the fish feeds from various ranges of sources. The certain transformation in direction was influenced by the reactions and initiatives from the respective business world to encourage the firm providing a high degree of attention to increasing social value by the business practices and procedures. However, the particular nature of research encompassing both the creating of social value and undertaking rational approaches complying the social needs and requirements spawns high cost for the business in the division of research and development (Salthouse 2016). Therefore, the company should need to counter the risks in the forthcoming course of operations to ensure the intensification of profitable returns covering the massive investment made to conduct the proposed business research.
According to Northhouse (2015), research and development refer to an apparent investment made by the business with the intention generating favourable cash flows in the future of operations. The earlier segments of the report have discussed the essence of research and development in the context of the business environment while clarifying the reasons driving the entities to adopt such procedure. Based on the practical implications of R&D, the significant outcomes of the process lead the firm to meet the requirement of defining new assets for the business (Zikmund et al. 2013). Regardless of such fact, GAAP has instructed to treat the expenditures associated with R&D as a cost for conducting business rather than identifying it as an investment. The particular fact is evidenced by the treatment of R&D cost by the business, as entire expenditure deducted from the operating profit, instead of capitalising in the capital section of the business.
Such understanding signifies the associated cost mainly creates the fundamental distinction between the different types of research and development. There is separate expenditure involved distinctively with research and development phase explicitly causing the creation of uniquely identifiable assets for the business (Zikmund et al. 2013). Such asset can either be usable to generate a certain amount of surplus to the business or sellable, i.e. transferrable to another enterprise.
From the analysis of the case study, the past research activities adopted by the bioresearch firm in the Australian environment were not highly cost-consumptive. As part of the former business research, it drove the business to provide priority to studying a plant based feed when the highly valued fish based feeds failed to strive in the identified market. The new newly identified research on the use of bacteria to produce fish feeds is determined by the firm to form and deliver an adequate response to the numerous issues faced by the enterprise due to the substantial implications of environmental and social requirements. The major different between the two approaches of R&D process is the involvement of high cost in the latest method due to the separate expenditure of required incurring by the firm for both research and development (Bryman and Bell 2015). As part of the development phase, the company would substantially require arranging the sum of annual investment while designing new assets in the production line to meet the outcomes obtained through the research.
During the acquisition of another business, the board of director will always look into the value of a patent associated with the enterprise for developing a better understanding, as dictated by Gioia, Corley, and Hamilton (2013). Therefore, establishing a superior value for the patent is essential for the business for welcoming fundamental level of opportunities from the business environment. However, there is a vast array of factors affecting the valuation of patents for a firm striving it to grow proficient level of understanding regarding the assessment methodology (McNiff 2013). Furthermore, these methods are applied by depending on the usefulness of experience for ensuring the accurateness and delivering the objectives associated with the patent on a timely basis. In this particular case, Patton et al. (2016) have pointed out the imperative inclusion of financial analysis tools for developing needful assumptions and valuations providing assistance in determining the fair market value of the patent.
In case of BSF Ltd, the application of patent is necessary for securing the huge sum of investment made in the R&D process. Based on the condition of the business environment of the chosen firm, it is assumed that a ‘True and Fair View’ valuation method should need to be in practice for determining the fair market value (Ritchie et al. 2013). Moreover, Ritchie et al. (2013) have clarified that overall process aims to provide further improvement options to the valuation of the intellectual properties, exclusively the patents. The development cost associated with a patent will be disclosed in the balance sheet of the company by adhering to the accounting standards outlined by IFRS and GAAP.
A patent is meant to safeguard the R&D strategies applied by BSF Ltd with the high anticipation of gaining an increase in sale or at least developing a cost-saving measure for the business to ensure its growth in the identified market. Based on the scenario, the calculation of fair market value of the identified patent should need to be conducted by involving an income-based approach.
Net market value of the patent – AUD 700,000,000
Discount Rate for the Project – 8% pa
It is assumed that the income tax rate is 40% and the present value annuity factor is 4.6755
On the other hand, the amortisation period is considered as 10 years
Amortisation effect factor = 1/1 – (Income Tax Rate) x (present value annuity factor)/ amortisation period
= 1/1 – (40%) x (4.6755)/15 years
= 14%
Therefore, present market value of the patent is,
Therefore, Amortisation effect factor = AUD7, 000,000 x (1 + 14%) = AUD 7,980,000
The principal transactions of BSF Ltd, as highlighted through the case study between the period of 2013 and 2016 are needed to be evaluated critically for ensuring their impartiality. Based on dictation of case study, BSF Ltd has obtained a grant from CSIRO for ensuring the investment in R&D, as the overall scenario should prompt the accountant of the firm to create journal entries in the following order (Portney and Watkins 2015):
Cash / Bank a/c Dr. $500 million
To, Deferred income a/c Cr. $500 million
(Being the grant received)
Deferred income a/c Dr. $500 million
To, Income from CSIRO Cr. $500 million
(Being grant recognized in the P/L account)
Concerning the findings reflected by Baskerville et al. (2016), the above identified journal entries lead towards the requirement of verifying such entries by the auditors to ensure the compliance with IAS 20. Therefore, the company should need to provide proper emphasis to the auditor duties and responsibilities of its auditors for eliminating misconceptions and errors in the financial reporting process right through the beginning.
From the application of the case study, BSF Ltd had utilised the availed fund in different means, as the guidelines associated with IAS has indicated to use or commit the amount of resource in some specific areas (Cervone and Pervin 2015). The particular case study reveals that the specific amount of fund obtained from CSIRO was allocated by BFS Ltd to establish its business research and ensuring development for the coming two years.
The case study reflecting the assertion of the management to developing control over the bacteria-based feeds technology cannot be thoroughly validated or justified. It is acknowledged due to the failure to conduct a successful research by the previous organization concerning the development of a sustainable aquaculture approach. The improper application of technology would cause the death of wide number of fish from the aqua environment, where the proper control mechanism by the organization could reduce the occurrence of such scenario (Charmaz 2014). Apart from that, the extensive control over the use of technology would significantly reduce time and cost associated with such investment.
References
Baskerville, R.L. and Wood-Harper, A.T., 2016. A critical perspective on action research as a method for information systems research. In Enacting Research Methods in Information Systems: Volume 2 (pp. 169-190). Springer International Publishing.
Bryman, A. and Bell, E., 2015. Business research methods. Oxford University Press, USA.
Cervone, D. and Pervin, L.A., 2015. Personality, Binder Ready Version: Theory and Research. John Wiley & Sons.
Charmaz, K., 2014. Constructing grounded theory. Sage.
Cicchetti, D., 2016. Developmental psychopathology, theory and method(Vol. 1). John Wiley & Sons.
Corbin, J. and Strauss, A., 2014. Basics of qualitative research: Techniques and procedures for developing grounded theory. Sage publications.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Gioia, D.A., Corley, K.G. and Hamilton, A.L., 2013. Seeking qualitative rigor in inductive research notes on the Gioia methodology. Organizational Research Methods, 16(1), pp.15-31.
McNiff, J., 2013. Action research: Principles and practice. Routledge.
Northouse, P.G., 2015. Leadership: Theory and practice. Sage publications.
Patton, L.D., Renn, K.A., Guido, F.M., Quaye, S.J., Evans, N.J. and Forney, D.S., 2016. Student development in college: Theory, research, and practice. John Wiley & Sons.
Portney, L.G. and Watkins, M.P., 2015. Foundations of clinical research: applications to practice. FA Davis.
Ritchie, J., Lewis, J., Nicholls, C.M. and Ormston, R. eds., 2013. Qualitative research practice: A guide for social science students and researchers. Sage.
Salthouse, T.A., 2016. Theoretical perspectives on cognitive aging. Psychology Press.
Zikmund, W.G., Babin, B.J., Carr, J.C. and Griffin, M., 2013. Advances in leader and leadership development: A review of 25years of research and theory. The Leadership Quarterly, 25(1), pp.63-82.
Zikmund, W.G., Babin, B.J., Carr, J.C. and Griffin, M., 2013. Business research methods. Cengage Learning.
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