The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc

Murtala Zakari; Sani Saidu

doi:doi:10.11648/j.ijafrm.20170203.11

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The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc

Murtala Zakari, Sani Saidu

Received: 28 May 2017 Accepted: 23 June 2017 Published: 25 July 2017

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Abstract

This study seeks to examine the accounting treatments of Research and Development (R&D) costs and to assess the impact of the treatments on the statement of profit or loss, and financial position of Chemring Group Plc using secondary data for 2015 financial year. To achieve this, data were obtained from Chemring Group’s 2015 annual reports and accounts, and analyzed using content analysis such as tables, walk through accounting illustration and key financial ratios, this is the major contribution of this study demonstrating practically the impact of the treatments of R&D costs, which to the best knowledge of the researcher has not been analyzed before. Findings from the analysis show that expensing all R&D costs has reduced the value of non-current asset and equity at the same proportion to the tune of the initial capitalized amount of development costs. This has impacted the financial position and the balance sheet size negatively by £36.1m. Due to the decline in profit and the balance sheet size in terms of assets and equity, the efficiency ratios have indicated down ward trend while the long term solvency ratio indicates the company is more geared. The study concludes that expensing all R&D costs reduces net asset and equity thereby reducing the size of the balance sheet, and potential investors and other users of financial statement evaluating the company would note that the assets appearing on the balance sheet are incomplete because the huge amount spent to create future benefits are not recognized and reported in the statement of financial position of the company.

DOI	10.11648/j.ijafrm.20170203.11
Published in	International Journal of Accounting, Finance and Risk Management (Volume 2, Issue 3, August 2017)
Page(s)	92-97
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

R&D, Cost, Expenditure, IAS 38, Profit or Loss, Financial Position, Chemring Group

References

[1]	Accounting for Research and Development, section 11.4 from the book Accounting in the Finance World (v. 1.0), available from: http://catalog.flatworldknowledge.com.
[2]	Anagnostopoulou, S. C., (2010) “Does the Capitalization of Development Costs Improve Analyst Forecast Accuracy? Evidence from the UK,” Journal of International Financial Management and Accounting, pp. 62–83.
[3]	Bowman, E. H. and Haire, M. (1975) “A Strategic Posture Toward Corporate Social Responsibility’, California Management Review, 18, pp49–58.
[4]	Brice, S., (2009) ‘Implications of Capitalizing Development Costs’, AICPA Store, available from:https://www.aicpastore.com/Content/media/PRODUCERCONTENT/Newsletters/Articles2009/CPA/Sep/DevCosts.jsp.
[5]	Chemring Group (2015) Annual Reports and Accounts, available from: http://www.chemring.co.uk/investors/reports-archive/2015/annual-report-2015.aspx.
[6]	Cochran, P. L. and Wood, R. A. (1984) “Corporate Social Responsibility and Financial Performance”, Academy of Management Journal, 27(1), pp42–56.
[7]	International Accounting Standard 38: Intangible Assets, paragraph 8, 52, 54, 55, 56, 57, and 59, available from: http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias38.
[8]	Lev, B. and T. Sougiannis, (1996) “The Capitalization, Amortization, and Value Relevance of R&D,” Journal of Accounting and Economics, pp. 107–138.
[9]	Mitrione, L., Tanewski, G., Birt, J. (2013) “The Relevance to Firm Valuation of Research and Development Expenditure in the Australian Health-Care Industry”, Australian Journal of Management, vol. 39, no.3, pp. 425–452.
[10]	Mohd, E., (2005) “Accounting for Software Development Costs and Information Asymmetry,” The Accounting Review, pp. 1211–1231.
[11]	Sikdar, C. and Mukhopadhyay, K., (2016)”Productivity and Research and Development Content of Intermediate Inputs - Evidence from Indian Industries”, Journal of Development Areas, vol.50, no.3, pp. 337-356.
[12]	Tami, D., Brigitte, E., Wolfgang, S., Leif, S.( 2015) “Research and Development, Uncertainty, and Analysts’ Forecasts”: The Case of IAS 38’, Journal of International Financial Management & Accounting, vol. 26, no. 3, pp.257-302.
[13]	Wyatt, A., (2005) “Accounting and Recognition of Intangible Assets: Theory and Evidence on Economic Determinants,” The Accounting Review, pp. 967–1003.
[14]	Zakari, M. (2006) “An Assessment of Depreciation Practice in Nigeria Commercial Banks”. Unpublished project, for a partial fulfillment for the award of bachelor degree, Bayero University Kano, Nigeria.

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APA Style

Murtala Zakari, Sani Saidu. (2017). The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc. International Journal of Accounting, Finance and Risk Management, 2(3), 92-97. https://doi.org/10.11648/j.ijafrm.20170203.11

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ACS Style

Murtala Zakari; Sani Saidu. The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc. Int. J. Account. Finance Risk Manag. 2017, 2(3), 92-97. doi: 10.11648/j.ijafrm.20170203.11

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AMA Style

Murtala Zakari, Sani Saidu. The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc. Int J Account Finance Risk Manag. 2017;2(3):92-97. doi: 10.11648/j.ijafrm.20170203.11

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@article{10.11648/j.ijafrm.20170203.11,
  author = {Murtala Zakari and Sani Saidu},
  title = {The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc},
  journal = {International Journal of Accounting, Finance and Risk Management},
  volume = {2},
  number = {3},
  pages = {92-97},
  doi = {10.11648/j.ijafrm.20170203.11},
  url = {https://doi.org/10.11648/j.ijafrm.20170203.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijafrm.20170203.11},
  abstract = {This study seeks to examine the accounting treatments of Research and Development (R&D) costs and to assess the impact of the treatments on the statement of profit or loss, and financial position of Chemring Group Plc using secondary data for 2015 financial year. To achieve this, data were obtained from Chemring Group’s 2015 annual reports and accounts, and analyzed using content analysis such as tables, walk through accounting illustration and key financial ratios, this is the major contribution of this study demonstrating practically the impact of the treatments of R&D costs, which to the best knowledge of the researcher has not been analyzed before. Findings from the analysis show that expensing all R&D costs has reduced the value of non-current asset and equity at the same proportion to the tune of the initial capitalized amount of development costs. This has impacted the financial position and the balance sheet size negatively by £36.1m. Due to the decline in profit and the balance sheet size in terms of assets and equity, the efficiency ratios have indicated down ward trend while the long term solvency ratio indicates the company is more geared. The study concludes that expensing all R&D costs reduces net asset and equity thereby reducing the size of the balance sheet, and potential investors and other users of financial statement evaluating the company would note that the assets appearing on the balance sheet are incomplete because the huge amount spent to create future benefits are not recognized and reported in the statement of financial position of the company.},
 year = {2017}
}

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TY  - JOUR
T1  - The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc
AU  - Murtala Zakari
AU  - Sani Saidu
Y1  - 2017/07/25
PY  - 2017
N1  - https://doi.org/10.11648/j.ijafrm.20170203.11
DO  - 10.11648/j.ijafrm.20170203.11
T2  - International Journal of Accounting, Finance and Risk Management
JF  - International Journal of Accounting, Finance and Risk Management
JO  - International Journal of Accounting, Finance and Risk Management
SP  - 92
EP  - 97
PB  - Science Publishing Group
SN  - 2578-9376
UR  - https://doi.org/10.11648/j.ijafrm.20170203.11
AB  - This study seeks to examine the accounting treatments of Research and Development (R&D) costs and to assess the impact of the treatments on the statement of profit or loss, and financial position of Chemring Group Plc using secondary data for 2015 financial year. To achieve this, data were obtained from Chemring Group’s 2015 annual reports and accounts, and analyzed using content analysis such as tables, walk through accounting illustration and key financial ratios, this is the major contribution of this study demonstrating practically the impact of the treatments of R&D costs, which to the best knowledge of the researcher has not been analyzed before. Findings from the analysis show that expensing all R&D costs has reduced the value of non-current asset and equity at the same proportion to the tune of the initial capitalized amount of development costs. This has impacted the financial position and the balance sheet size negatively by £36.1m. Due to the decline in profit and the balance sheet size in terms of assets and equity, the efficiency ratios have indicated down ward trend while the long term solvency ratio indicates the company is more geared. The study concludes that expensing all R&D costs reduces net asset and equity thereby reducing the size of the balance sheet, and potential investors and other users of financial statement evaluating the company would note that the assets appearing on the balance sheet are incomplete because the huge amount spent to create future benefits are not recognized and reported in the statement of financial position of the company.
VL  - 2
IS  - 3
ER  -

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Author Information

Murtala Zakari

Post Graduate School of Accounting and Finance, Leeds Beckett University, Leeds, UK
Sani Saidu

Othman Yeop Abdullah Graduate School of Business, Universiti Utara Malaysia (UUM), Kedah Darul Aman, Malaysia

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APA Style

Murtala Zakari, Sani Saidu. (2017). The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc. International Journal of Accounting, Finance and Risk Management, 2(3), 92-97. https://doi.org/10.11648/j.ijafrm.20170203.11

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ACS Style

Murtala Zakari; Sani Saidu. The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc. Int. J. Account. Finance Risk Manag. 2017, 2(3), 92-97. doi: 10.11648/j.ijafrm.20170203.11

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AMA Style

Murtala Zakari, Sani Saidu. The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc. Int J Account Finance Risk Manag. 2017;2(3):92-97. doi: 10.11648/j.ijafrm.20170203.11

Copy | Download

@article{10.11648/j.ijafrm.20170203.11,
  author = {Murtala Zakari and Sani Saidu},
  title = {The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc},
  journal = {International Journal of Accounting, Finance and Risk Management},
  volume = {2},
  number = {3},
  pages = {92-97},
  doi = {10.11648/j.ijafrm.20170203.11},
  url = {https://doi.org/10.11648/j.ijafrm.20170203.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijafrm.20170203.11},
  abstract = {This study seeks to examine the accounting treatments of Research and Development (R&D) costs and to assess the impact of the treatments on the statement of profit or loss, and financial position of Chemring Group Plc using secondary data for 2015 financial year. To achieve this, data were obtained from Chemring Group’s 2015 annual reports and accounts, and analyzed using content analysis such as tables, walk through accounting illustration and key financial ratios, this is the major contribution of this study demonstrating practically the impact of the treatments of R&D costs, which to the best knowledge of the researcher has not been analyzed before. Findings from the analysis show that expensing all R&D costs has reduced the value of non-current asset and equity at the same proportion to the tune of the initial capitalized amount of development costs. This has impacted the financial position and the balance sheet size negatively by £36.1m. Due to the decline in profit and the balance sheet size in terms of assets and equity, the efficiency ratios have indicated down ward trend while the long term solvency ratio indicates the company is more geared. The study concludes that expensing all R&D costs reduces net asset and equity thereby reducing the size of the balance sheet, and potential investors and other users of financial statement evaluating the company would note that the assets appearing on the balance sheet are incomplete because the huge amount spent to create future benefits are not recognized and reported in the statement of financial position of the company.},
 year = {2017}
}

Copy | Download

TY  - JOUR
T1  - The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc
AU  - Murtala Zakari
AU  - Sani Saidu
Y1  - 2017/07/25
PY  - 2017
N1  - https://doi.org/10.11648/j.ijafrm.20170203.11
DO  - 10.11648/j.ijafrm.20170203.11
T2  - International Journal of Accounting, Finance and Risk Management
JF  - International Journal of Accounting, Finance and Risk Management
JO  - International Journal of Accounting, Finance and Risk Management
SP  - 92
EP  - 97
PB  - Science Publishing Group
SN  - 2578-9376
UR  - https://doi.org/10.11648/j.ijafrm.20170203.11
AB  - This study seeks to examine the accounting treatments of Research and Development (R&D) costs and to assess the impact of the treatments on the statement of profit or loss, and financial position of Chemring Group Plc using secondary data for 2015 financial year. To achieve this, data were obtained from Chemring Group’s 2015 annual reports and accounts, and analyzed using content analysis such as tables, walk through accounting illustration and key financial ratios, this is the major contribution of this study demonstrating practically the impact of the treatments of R&D costs, which to the best knowledge of the researcher has not been analyzed before. Findings from the analysis show that expensing all R&D costs has reduced the value of non-current asset and equity at the same proportion to the tune of the initial capitalized amount of development costs. This has impacted the financial position and the balance sheet size negatively by £36.1m. Due to the decline in profit and the balance sheet size in terms of assets and equity, the efficiency ratios have indicated down ward trend while the long term solvency ratio indicates the company is more geared. The study concludes that expensing all R&D costs reduces net asset and equity thereby reducing the size of the balance sheet, and potential investors and other users of financial statement evaluating the company would note that the assets appearing on the balance sheet are incomplete because the huge amount spent to create future benefits are not recognized and reported in the statement of financial position of the company.
VL  - 2
IS  - 3
ER  -

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