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Exam Code: PSM-I

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Under US GAAP accounting, R&D expenses cannot be capitalized. They must be expensed as and when incurred. Which of the following is NOT a reason to support this practice?
A. In most cases, there is a significant lag between R&D expenses and the determination of the potential success of the research.
B. Most R&D activities represent intangible benefits which are hard to evaluate objectively from an accounting perspective.
C. There remains a high uncertainty about the ultimate benefits to be derived from the R&D activities on which the expenses are incurred.
D. R&D expenses are difficult to measure and hence, must be expensed in accordance with accrual accounting principles.
Answer: D
Note that R&D expenses are, for the most part, are clearly ear-marked as such and hence, are not difficult to measure. Of course, some of these expenses go into generating tangible assets like laboratories and flasks but these are easily measurable and do get capitalized under US GAAP. The other three reasons imply that it is difficult to measure the present value of the assets being generated (if at all) by the research. This prevents a consistent and reliable application of the accrual principles, which require allocation of expenses in proportion to the current benefits generated. Hence, US GAAP takes the easiest solution of expensing all the R&D costs.

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