R&D expenditure can expensed or capitalised. When it's
expensed, the total expenditure is declared as expense in the
current period, reducing current profits by that amount. When it's
capitalised, part of the expenditure is declared as expense in the
current period and part is declared as expense in future periods,
increasing current profits and reducing future profits.
Capitalisation can provide a signal to investors about future
benefits of current R&D projects, whereas expensing can reveal
strategic information about R&D to competitors. I'm not an
accountant and I admit there's much more to this than I currently
understand, but I'm wondering if the motivation to use
capitalisation is to give the perception of greater current
profits. Is this short-termism?
"Short-termism refers to the excessive focus of some corporate leaders, investors, and analysts on short-term, quarterly earnings and a lack of attention to the strategy, fundamentals, and conventional approaches to long-term value creation. An excessive short-term focus combined with insufficient regard for long-term strategy can tip the balance in value-destructive ways for market participants, undermine the market's credibility, and discourage long-term value creation and investment. Such short-term strategies are often based on accounting-driven metrics that are not fully reflective of the complexities of corporate management and investment."
- Breaking the Short-Term Cycle: Proceedings of the CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics Symposium Series on Short-Termism. (Via Slow Leadership )
There's got to be something wrong when the financing process for projects is so focused on capitalisation of R&D that it actually degrades a project's ability to create value and generate profit by delivering product to customers quickly and repeatedly. Isn't this an implicit acknowledgement by the organisation that it expects the project to fail, by being late and over budget? Isn't this approach largely about damage limitation? I don't call that being set up for success. You're beaten before you start.
If a process to support capitalisation adds significant waste in the form of an inventory of every conceivable requirement (detailed up front and captured within huge specification documents), it has got to be partly responsible for the failure. Hasn't it? And when the process gets in the way of generating sales revenue the alarm bells must be ringing. Right? If it were my money I'd want it spent on creating working software and getting it to the market pronto. Capitalisation is important but it should never be as important as getting product to customers. Only when you deliver functionality that customers want can you secure their loyalty and continued custom, and make money.
2 Comments
It has nothing to do w/short vs long-term. It has to do with matching the reported benefit of the R&D with the time period the benefit occurs. If you think R&D will reap benefits over 5 year period, shouldn't the expenses be reported over that same period?
Linda
A previous boss referred to capitalisation as the "crack-cocaine" of accounting. A manager gets a short-term high on his reporting, but has to keep cranking up the dose to maintain the effect.