When it comes to R&D reporting, ACCA said there’s substantial room for improvement.
According to a new research by ACCA and the Adam Smith Business School of the University of Glasgow, 53% of organisations are not separately reporting any R&D assets or expenses.
The research, Reporting of R&D: Disclosure without recognition?, found a disconnect between disclosures in the narrative sections of annual reports and the financial statements, potentially confusing users, ACCA pointed out.
Annual reports containing a high volume of R&D-related terms despite not reporting any R&D expenditure separately, are sending mixed signals to users about the significance of R&D to the organisation, said Ioannis Tsalavoutas, professor of Accounting, University of Glasgow.
“Disclosures indicating investment in R&D, but without appropriate detail can be confusing to stakeholders that are looking for information to help inform decisions,” he noted.
Probable reasons for disconnect
The probable reasons for the disconnect — identified through a series of roundtable discussions with preparers of financial statements, auditors, standard setters and policymakers —are as follows, according to the report.
- ambiguity over what constitutes R&D in the contemporary economy
- difficulty in applying materiality by nature in disclosures
- an absence of explicit requirements for disclosing qualitative information about R&D
- lack of incentives for separately recording and reporting of R&D expenditure, for instance tax reliefs or R&D grants
- a corporate culture that reduces the openness and extent of R&D reporting, and
- the organisation’s funding requirements raising concern over reporting.
The findings in the study also point towards the following fundamental problems R&D reporting.
- If an R&D activity is not considered R&D according to IAS 38, the expenditure is recognised and reported according to its underlying nature. Hence, no R&D expenditure is reported despite a high volume of R&D-related terms used in the narratives.
- R&D expenditure may have been recognised, but the amount was not reported separately.
- Ambiguous disclosures that indicate investment in R&D without reporting the amounts involved are not decision useful and are confusing.
Improved R&D reporting should help users understand the significance of R&D to an organisation’s business model, and connect it to any material financial, social and/or environmental impact relevant to the organisation, said Aaron Saw, ACCA senior subject manager – Corporate Reporting.
Recommendations for standard setters and policymakers include a critical review and update of the definitions of intangibles and R&D in IAS 38 Intangible Assets; a review of the requirements for recognition and measurement of intangibles and R&D; enhanced disclosure requirements and guidance on applying the definition, and the recognition and measurement requirements, ACCA pointed out.
According to ACCA, professional accountants need to review and identify activities that should be classified, and accounted for, as R&D.
Other actions that the report recommends include connecting non-financial information in the narratives with financial information in the financial statements and providing the information that explains the significance of R&D to the organisation’s business model.
Recommendations for those charged with governance include a critical assessment of the application of materiality by management, to ensure that both the qualitative and quantitative aspects of materiality have been considered when preparing disclosures in the financial statements, along with a review of the relevance and connectivity of information in the narratives and financial statements, ACCA said.
Auditors are advised to assess the discovery of any activity that should be classified and accounted for as R&D for the risk of material misstatement and report the discovery to those charged with governance if it is a significant finding, the accountancy body added.