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Subject: Re: Research and development---info. Author: Steve Bonkers [ Next Thread | Previous Thread | Next Message | Previous Message ] Date Posted: 13:31:12 03/04/02 Mon In reply to: Steve Bonkers. 's message, "Re: Research and development---info." on 07:36:15 02/10/02 Sun Posted by: tony1000 Mar 5 2002 8:16:12:390AM Reply to post #2122 by bonkers Go to Post # Previous Respond Message List There are two schools of thought regarding capitalising R&D. Hope I'm not preaching stuff everyone already knows. You can take the conservative approach and expense it as you spend the money or you can put it in a bucket to writeoff in future years. Most R&D organisations like to capitalise R&D as it improves the P&L in the current FY. In ERG's case last FY they capitalised $40 million in R&D which is an awful lot of money if they did similar things in previous years. If they had expensed it then it would have come off the bottom line. You can carry capitalised R&D on your books and write it off over a number of years as long as the company and its auditors reasonably believe that the specific intellectual property developed with the money in that year will in the future generate sufficient profits to offset the original cost. If you are in the very early stages of developing products you don't want to be saddled with the R&D expense as you don't have any profit to offset it against. It makes the end of year figures look real bad if you have to show a big loss. Conversely if you capitalise your R&D then once you have your profitable product in the market you will then have to pay off your R&D costs. This will depress your stated profits in future years. In ERG's case it wouldn't make a material difference to their current tax/cash position at the moment as writing off last years R&D would have given them a $40 million loss item to add to the carried forward tax loss (as they didn't pay any tax). It is one of those items that company directors hate to expense in the year as it looks bad but they also hate having to expense it in future years as it hurts the profit then. Damned if you do, damed if you don't. The only real risk is if all or part of the technology developed is determined to have less value than the amount capitalised. In that case the company is forced to write down the amount in the year the decision is taken. There have been some big writedowns on R&D organisations who had to do this in previous years. There are also other companies who have decided to change their accounting approach and have expensed all capitalised R&D plus the R&D in the current year. I believe CISCO expenses all its R&D (but don't quote me here) If you can handle it with your profits it is always better to take the conservative approach and expense R&D costs off in the year they are incurred. (As I said before most companies don't because directors are always concentrating on maximising the P&L in the current year) Hope this all makes sense. In this case I'm not giving any view as to whether it is good or bad for ERG. Just thought people might like to understand R&D capitalision. (Voluntary Disclosure:No Position Short Term rating: Long Term Rating:) OZeStock Advertisment:"Make a prediction about your favourite stock and share your opinions. www.stockpicker.com.au" [ Next Thread | Previous Thread | Next Message | Previous Message ]