Innovating for the future - investing in R&D
ACCA's response to the Consultation Paper Innovating for the Future: investing in R&D issued by HM Treasury and the Department of Trade and Industry is set out below:
Innovating for the Future
ACCA welcomes this opportunity to comment on the above consultation document. It was considered by ACCA's Financial Reporting Committee at a recent meeting, and I am writing to give you their views, which are principally on the accounting aspects of the document.
As a general comment, in the experience of the members of the Committee the availability of investment or venture capital is not the major constraint on the expansion of expenditure on research and development (R&D) in the UK.
Accounting treatment
The accounting treatment of expenditure on R&D was not viewed as a key factor in keeping the level of expenditure in the UK at a comparatively low level. The Committee did not see the need for substantial changes to existing standards and practice.
The Committee's responses to the specific matters raised for comment in paragraph 3.09 in the consultation document are set out below.
Is it time to review the current accounting treatment of R&D? If so, are the ICAS proposals a step in the right direction?
The current standard (SSAP13) offers a choice of either writing off development costs or of capitalising them if certain conditions are met. In principle options in accounting standards are undesirable and ideally should be progressively reduced. Among UK companies immediate write off is the most common choice as an accounting policy for R&D, and we see considerable merit in this choice from the point of view of prudence. We would not support therefore the compulsory capitalisation proposal in the ICAS paper.
We would agree that much of the text of SSAP13 is couched in scientific, laboratory and manufacturing terms. However we think that its key clauses are sufficiently widely phrased to encompass most forms of innovation. For example SSAP13 defines development as "use of scientific or technical knowledge in order to produce new or substantially improved materials, devices, products or services…" Technical knowledge, products and services seem fairly wide terms which would cover many innovatory items and their costs. We see little need to expand the scope from R&D to innovation. It seems a weakness of the ICAS paper that it does not attempt to define the term "innovation".
Does the limited ability to capitalise R&D discourage spending on R&D and innovation?
We do not think that UK companies are discouraged from spending on R&D by the restrictions on its capitalisation. Indeed the majority of UK companies, when offered the choice between immediate write-off or capitalisation, have chosen the former. Also we note that the ICAS survey found that the accounting treatment did not affect the level of expenditure among the companies covered.
Does FRS10's treatment of intangible assets provide sensible incentives to managers?
Presumably this refers to the compulsory immediate write off of all self-generated intangible assets. The cases involved would be those self-generated assets not eligible to be dealt with as development costs under SSAP13. As with R&D we do not think that the restrictions on capitalisation are a disincentive to investment in this area.
How can "know how" best be reflected in company reporting, given the constraints of FRS10?
Capitalisation opportunities will probably be limited as a result of the uncertainties attaching to many of such intangibles. Good disclosure and presentation, however, of the results and the expenditure on R&D, know how and other intangibles may be as good or better than capitalisation. The discussion and analysis of prospects in the Operating and Financial Review may be an appropriate place for this. Non-monetary (but quantified) measures may be helpful, for example, of the extent of staff training, the development or launch of new products, quality improvements in products or services etc. All of these would need in our view for the present to be recommendations of best practice, rather than requirements.