New Products
Question: Companies spend billions of dollars on research and development each year in hopes of creating
new products that can be sold in the future. This money would never be spent unless officials believed that
a reasonable chance existed to recoup such huge investments. However, whether success is 100 percent likely
or only 2 percent, no asset are reported on the balance sheet for these costs. Because all amounts spent on
research and development are expensed automatically, are the assets reported by companies in industries such as
technology and pharmaceuticals not omitting many of their most valuable future benefits? If a company spends
$5 billion to develop a new drug or electronic device that becomes worth $8 billion, does reporting absolutely no
asset make sense?
Answer: Even a student in an introductory accounting course can quickly recognize the problems created by a
rule requiring that all research and development costs be expensed as incurred. Technology, pharmaceutical, and
many other companies must exclude items of significant value from their balance sheets by following U.S. GAAP.
While this approach is conservative, consistent, and allows for comparability, the rationale is confusing. The
balance sheet hardly paints a fair portrait of the underlying organization. Expensing research and development
costs also violates the matching principle. These expenditures are made in the hopes of generating future revenues
but the expense is recorded immediately.
