Today, we live in a world of ideas. In the future, these ideas — that is, intellectual property — will be the key business driver.

With the walls between industries dissolving, many new concepts such as a driverless car are already about to enter the market.

Let us look at some of the global and national statistics related to research and development, and evaluate the related accounting and auditing issues.

In terms of gross domestic product, or GDP, Israel’s spend on R&D is 4.2 per cent of the GDP followed by South Korea (3.74 per cent), and Japan (3.67 per cent). India spends around 0.9 per cent of its GDP on R&D.

At the corporate level, Toyota, Samsung, Microsoft, IBM and Google spend more than $5 billion on R&D while others such as General Electric, Amazon, Apple, Procter & Gamble and 3M spend from $1.5 billion to $5 billion a year.

Corporates keen on growth always invest significantly on R&D. Government support in terms of R&D facilities, schemes and tax benefits is critical to the ultimate success of any research effort.

Europe is in the middle of an economic crisis. But the European Union is conscious about R&D effort and is bringing it to market effectively.

“Innovation has been placed at the heart of the EU’s strategy to create growth and jobs for 2020. EU countries are encouraged to invest 3 per cent of their GDP in R&D by 2020,” says its official Web site.

The EU has a budget of €50.5 billion under the Seventh Framework Programme 2007-13

It is encouraging to know that World Intellectual Property Indicators 2012 showed a growth despite the economic downturn. Patent applications increased by 7.7 per cent during 2009-11, with the highest increase in the food and chemistry sector (8.5 per cent). In India, patent applications increased by 11.1 per cent during 2009-11 (Source: Report of the Director General to the World Intellectual Property Organization (WIPO) Assemblies 2013).

At the national level, the number of patents granted during 2010-11 touched 7,509 (6,168 in 2009-10), of which only 1,273 went to Indian applicants. Similar data trend is seen for in-house R&D. An R&D expenditure of Rs 3,461 crore was certified for weighted tax deduction during 2010, compared with Rs 2,018.75 crore during 2009.

Accounting and auditing issues: With R&D activities growing both in terms of quantity and spend, the accounting fraternity has to support businesses in devising appropriate accounting treatment.

With Indian Accounting Standard AS-26 “Intangible Assets” aligned with the IAS-38, there are objective criteria defined to either expense out or capitalise these costs — for instance, development costs are capitalised only after the technical and commercial feasibility of the asset for sale or use has been established.

Auditor should be careful to understand the true colour of R&D expenses, as sometimes there is a thin line between what can be expensed out and what can be capitalised. Entities with poor governance practices may resort to asset creation to boost book profit and thereby manage stakeholders’ expectations.

While the Accounting Standard provides guidance, can there be an alternative approach to accounting for R&D in a growing economy that is investment-friendly? More research is needed in this area.

(Hemant M. Joshi is Partner and Nikhil Kenjale is Manager, Deloitte Haskins & Sells)

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