Abstract
Intangible investments have been found to contribute largely to value enhancement in firms and economies that spend colossus resources on them. Despite being an important component of valuation, such investments are largely ignored or given subjective treatment by the existing accounting standards and consequently, not included on firm valuation. The American standard (FASB-S2) establishes standards of financial accounting and reporting for research and development (RD secondly, allocation of equity and debt resources to the firm; thirdly, growth of intangible assets; and lastly, firm value in capital markets. Previously studies conducted under here have cut across the accounting treatment of R&D expenditure, and generally, internally generated intangibles using the International Financial Reporting Standards (IFRSs) and the U.S.’ Generally Accepted Accounting Principles (GAAPs). Majority of the studies analyzed agree that sufficient disclosure of R&D investment as well as other internally generated intangibles can supplement and improve the financial information provided by the firm. This in turn will improve the outlook of the financial statements which can improve their use and reliability to investors as well as give reliable inputs to financial analysts, thus improving the applied valuation models in computing dependable valuation figures for the firm. This, by and large, should avoid the negative consequences that may result from inadequate accounting treatment of R&D expenditures.
Highlights
Intangible assets such as research and development (R&D) have been found to play an important role in the performance of firms [45]
Firms involved in high R&D expenditures are difficult to value because their future profits depend on the achievement of yet to be implemented and uncertain experimental models
Expenses incurred by companies generally have three major; the first category is the operating expenditure which deals with expenses for the firm in the current period; second category consists of capital expenditure, which deals with expenses of the firm spanning multiple periods; and the third category consists of financial expenditure which are associated with debt capital of the firm
Summary
Intangible assets (capital) such as R&D have been found to play an important role in the performance of firms [45]. The accounting standard requires R&D expenditure to be totally expensed when incurred (GAAP), whereas, IAS 38 under the IASB framework, requires the research component expensed while the development component capitalized after satisfying the inclusion criteria [46]. This is because the accounting standards consider the ultimate R&D product to be uncertain and not easy to quantify. It is majorly supposed to contribute to: firstly suggesting to accounting standard setters on the accounting treatment and reporting of intangible investment so as to be more responsive to firm valuation; secondly, the study findings will help firms to formulate more realistic policies with regard to reporting R&D expenditures as it directly affects firm performance and resource allocation; and thirdly, the study findings will help in theory building. The first section looks at the study background; the second section deals with theoretical literature review of the accounting treatment of intangible assets, and focus more closely at theories of research and development (R&D) investments; section three looks at the empirical review of intangibles and R&D investments; and section four discusses the study findings and summarizes the review
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