Technical aspect to R&D...I'm desperate!!!

Ratherbefishing
Ratherbefishing Registered Posts: 11 New contributor 🐸
Hi can you help!!!

I am a bookkeeper(I am FMAAT & an ACCA Finalist) employed by a Ltd Co. whose criteria fits that of an SME definition whose finalised accounts comply with the Financial Reporting Standards for Smaller Entities. The reason I am stating that the company is a SME & applying FRSSE is I feel an important element to the question……

The situation is that the Director’s of the company are keen to (and have done so for the past two financial years) capitalised what they consider to be R&D expense. I think I understand the fundamentals of SSAP 13 in as much as the standard is designed to allow company’s to defer the initial expenses if they expect that the R&D will at some point in the future generate a revenue stream of some sort, hence the stringent criteria.

Whether or not I agree with their applied treatment to date isn’t relevant really, but it is clear that some revenue streams have now been generated (let’s say 40%, actual sales is £40,000 of an £100,000 order) from the capitalised R&D cost in the first year – my understanding was that 40% of the capitalised cost should have been reversed back into the profit & loss to match the income, but they are choosing to ignore that element of the standard, but hey, that can be discussed another day. I should point out that I did mention this to the company accountant, but he also chosen to ignore it, so maybe I am incorrect….

Anyway, the point I am trying to ascertain is whether any capitalisation should have occurred in the first place? Having read the standard in totality (which I initially missed) the standard does actually state and I quote…….the following:
“Reporting entities applying the Financial Reporting Standard for Smaller Entities currently applicable are exempt from this standard”.

It then continues under the heading of “accounting treatment”…….
“The cost of fixed assets acquired or constructed in order to provide facilities for the research and development activities over a number of accounting periods should be capitalised and written off over their useful lives through the profit & loss account.

Expenditure on pure and applied research (other than that referred to in paragraph 23) should be written off in the year of expenditure through the profit and loss account.

Development expenditure should be written off in the year of expenditure except in the following circumstances when it may be deferred to future periods”

- it then goes on to state the technical feasibility, commercial viability as we expect……so on and so forth…….

My inference now is that the standard is saying that if you are a SME applying the FRSSE, then you are exempt from (i.e. the company should ignore the standard altogether, therefore capitalising R&D is not even an option opened to them, and that any expenses incurred should immediately be expensed through the P&L as and when they are incurred in the year.

Is there anyone that has extensive knowledge or experience in this area that is prepared to give me their viewpoint on this matter please?

Thank you kindly in advance.

Comments

  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
    Hi,

    I answered this question elsewhere, but I will cover the technical issues just in case anyone else encounters the situation in the poster's question:
    • Companies applying FRSSE are exempt from applying full FRS but still report under the condensed FRSSE framework
    • FRSSE is basically a condensed version of the full FRS
    • It is not a substitute for full FRS - FRSSE runs in conjunction with FRS
    • Research & Development is covered from para 6.3 of the 2007 FRSSE
    • The conditions that have to be present when capitalising development costs are the same as those in SSAP 13. Research expenses are always written off to P&L as at the research stage you have no idea if the project will generate an income (thus failing to qualifying as an asset).
    • Para 6.5 of FRSSE gives those conditions of when to capitalise dev. costs.
    • If research expenditure capitalised, or conditions in 6.5 not met and costs subsequently capitalised - there has been a breach of FRSSE
    • If a breach has occurred, a/c should put a note in the accs. If audited, auditor should qualify audit report

    Best regards
    steve
  • Gill Gittings
    Gill Gittings Registered Posts: 121 Dedicated contributor 🦉
    I thought there was a 2008 FRSSE which has superseded the 2007 version so should you not be referring to that instead of 2007?
    Another query I have is in relation to the FRSSE itself. You said that it is not a substitute for the full standards, but surely if it is not a substitute then this surely means it cannot run alongside FRSSE.
    Could you clarify these issues for me as I am sure I have heard otherwise from other sources.
  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
    Hi,

    You are right that there is a 2008 version of FRSSE but that cannot be adopted earlier because it has been updated to take into consideration the provisions of the Companies Act 2006 Commencement Oreders which take effect from October 2008 (notably the increase in small company qualification and audit thresholds amongst other changes). Therefore companies must still report under 2007 FRSSE unless the accounting period commences on or after 6th April 2008.

    FRSSE is not a standalone document because if FRSSE is silent on the treatment of a transaction/event, the preparer of the accounts must go back to the headline standards (FRS). Prior to the 2007 version of FRSSE, the FRSSE contained the derivation tables which cross-referenced the FRSSE to its headline standard, therefore FRSSE runs in conjunction with full FRS (it's merely a condensed version of the full standards).

    The confusion lies with the phrase "Companies applying the FRSSE are exempt from the requirements of FRS....". This means that whilst a company reporting under FRSSE is exempt from the requirements of FRS it is reporting under the governing framework which is FRSSE. However, as mentioned previously, if FRSSE is silent on an issue, the user must go back to full FRS for the required treatment.

    Lecturers/speakers/accountants who say FRSSE is a stand alone document are in fact wrong to suggest this. The proposed IFRSSME (the new international standard for SME) is going to be stand alone, but FRSSE is not.

    Kind regards
    Steve
  • Gill Gittings
    Gill Gittings Registered Posts: 121 Dedicated contributor 🦉
    Hi

    Thanks for clarifying that. I was a bit confused with how companies are exempt from FRS but then have to go back to them if FRSSE does not deal with something.

    Thanks again.
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