Message posted to discussion forum: Problem Based Learning - Research and Development Costs

How should the research and development (R and D) costs of Extract Plc be accounted for in the accounts? The two options being to charge the amount to the profit and loss account, or to capitalize the expense.

It is important to consider why Extract Plc would want to capitalize their R and D costs. Elliot and Elliot (2006) suggest that a company needs to maintain capital or "there is a danger of dividends being paid out of real capital rather than out of real income". Another more simplistic way to look at it is that an expense reduces the apparent wealth of a company, whereas capital maintains or increases the wealth, as Elliot and Elliot (2006) suggest.

Returning to the problem, well there are indeed strict regulations for the treatment of R and D costs. This comes from IAS 38 (Intangible assets) and in particular specifies that 'research' expenditure should always be charged to the profit and loss account, whereas 'development' expenditure should be capitalized (Elliot and Elliot, 2006). If one refers back to the question…

"…The directors have approved additional expenditure for further research into the production of engineering equipment…"

"…So far the company has produced a prototype model…"

In particular the above relates to part a) of the 'development' research definition given in Elliot and Elliot (2006) which refers to:

"a) the design, construction and testing of PRE-PRODUCTION and PRE-USE PROTOTYPES and models"

It is obvious from the above that the extracts from Problem Statement Two (2006) meets the criteria 'development' expenditure.

Therefore Extract's policy of capitalizing this R and D is very much the appropriate method in line with IAS 38 (Elliot and Elliot 2006).

Elliot, B., Elliot, J. (2006) Financial Accounting and Reporting. Pearson Education: Harlow.


This posting to the discussion forum shows a progression from description through to some limited analysis and evaluation. The structure is informal, but for a report back to an electronic discussion forum it is acceptable.

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Quality: Structure

The opening sentence summarises the question which the message will address. This ensures that the reader is clear about the topic.

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It is good practice to write out an acronym in full the first time it appears, followed by the acronym in brackets. After this the acronym alone can be used.

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This is good use of a question to signpost information, putting it within the context of the PBL task set.

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Function: Analyse

This sentence specifies the two options which a company could choose from and sets up the analysis that follows.

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These sentences explain why the company would want to capitalise costs.

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This is a careful analysis of the Extract Plc example in light of the definition given in the set text, drawing an appropriate conclusion.

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Quality: Authority

The use of a direct quotation as part of the explanation in this paragraph adds authority to the analysis. This is appropriate referencing, but page numbers should also be given for direct quotes. Note that there is no need to repeat the reference after the direct quote: it is quite clear from the context which text is being cited.

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Good referencing provides authority and avoids accusations of plagiarism, important even where an argument is being summarised rather than quoted directly.

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Function: Describe

These two sentences describe the basic rules for accounting for R & D costs.

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Function: Evaluate

The function of this sentence is to explain whether Extract Plc"s costs should be classed as "development" or "research", allowing the writer to answer the question. "Therefore" shows that the writer believes the case to be proven by the evidence presented.

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