Table 1 details the various R d accounting rules

Research and development (R & D) activity is, by nature, subject to high uncertainty and asymmetry of high information that can have economic consequences. The question of the mode of accounting for R & D (loads or assets) therefore holds strategic importance for the managers and the standardisers. At the time of the establishment of the international accounting standards IFRS (International Financial Reporting Standards), this question takes importance. While the U.S. standardization body, the FASB (Financial Accounting Standards Board), requires the immediate load passage of all R & D costs (SFAS No. 2), international standards prescribed registration (capitalization) assets of R & D expenses if they meet certain conditions (IAS 38). The French accounting rules (CRC 04-06) continue to let the leader choosing to capitalize or not R & D costs if the project meets these conditions.

Supporters of the passage in loads defend this method because it prevents opportunistic use of registration to the assets of R & D costs. In addition, it is consistent with the principle of prudence. Registration for the active supporters counter that R & D expenditures are among the most popular economic assets in the current economy and that they are real investments, that is, they are creators of future income for the company. According to Lev and Sougiannis (1999), the accountants refusal to recognize these expenses as assets seriously affects the relevance of the financial statements. Thus, the passage to the costs of R & D expenses provides objective and verifiable information that registration for the assets of R & D costs can be used to convey information, but is also less reliable. For the normalizer, there is therefore a choice between (capitalization of R & D expenses) relevance and reliability of information (passage to expenses).

The rules for the accounting of the costs of R & D

The French regulatory environment regarding the accounting for R & D expenses comes to many changes, both for the social accounts and the consolidated accounts. Since January 1, 2005, European listed companies must submit their accounts consolidated in international standards, or the standard IAS 38 ("Intangible Assets") differs in several points of the French rule concerning R & D costs. More for non-listed companies, the CRC 04-06 Regulation (applicable to social accounts and consolidated accounts) changed the French rule regarding the accounting for R & D costs and it was closer to the international standard (IAS 38).

In France (regulation CRC 04-06), expenditures for research must be recognised as an expense when they are incurred. On the other hand, development costs can be recorded at the assets if they relate to much individualized projects, with a serious chance of technical success and commercial viability (1). French rule, since the CRC 04-06, much closer to the international standard. Indeed, the distinction between fundamental research, research applied and development which existed in the General Accounting plan 1999 (CCP 99) is abandoned in favour of a phase of development phase research dichotomy. In addition, the three criteria of CCP 99 are specified and returned to the IAS 38 criteria. However, even if accounting for the costs of the asset development is regarded as the preferred method by the new regulation of the CRC, a significant discrepancy remains with the standard IAS 38, which requires the activation of these costs once the various conditions are met. Finally, it is interesting to recall the American standard, since some French companies have a double rating France-United States and need to present US GAAP accounts, where all R & D costs (excluding the cost of software development) must be expensed for the year in which they are incurred.

The French treatment of the costs of R & D regulations can therefore be compatible with the American standards (US GAAP), which provide a consistent treatment in charge of all the costs of R & D, and with international rules (IFRS), prescribing a mandatory registration to the assets of the R & D "cost-effective". Table 1 details the various R & d accounting rules.

The impact of the activation of R & D costs

on the financial statements

Interestingly, at this stage of reflection, to illustrate the impact on the financial statements of the capitalization of expenses of R & d. imagine a society that would have incurred costs of development for a total of 200 million euros (110 million euros in R & D staff expenses and EUR 90 million of annual depreciation of the equipment used for the development project). The leader of the society decides to capitalize these costs and amortize them over the next five years, since he thinks that profits will result from this project on this period. The company had a net result before impact of this R & D project of 665 million euros.

Table 2 below summarizes the impact of funding the first year (columns 2 and 3), and then on the lifetime of the R & D project (following columns). The net result is significantly improved the year of the capitalization of R & D project. However, do not forget that the R & D capitalized will have an impact on his life in the case of our example: five years. Indeed, this new intangible asset will generate loads of staffing at the depreciation on the whole of his life, which has a negative impact on net income.

In practice, the impact of R & D is more complex than this simple illustration shows. Indeed the R & D is rarely limited to a project, and it is likely that new R & D costs will appear in year 2 and will be also capitalized, and therefore depreciated, etc. On the other hand, in France, the capitalization of R & D costs remains an accounting choice and can be used opportunistically. A company whose net income is very low or negative might be tempted to improve its situation by capitalizing R & D expenses for the sole purpose of improving its net result. However, it could be found in a vicious circle: the annual amount of the R & D depreciation on cumulative (on former projects) could become so important that the company should capitalize the costs of R & D of the year only to bear these expenses.

Mandatory capitalization of R & D expenses:

for or against

Accounting for the costs of R & D remains a bright subject of debate between standard-setters and users of financial information. Any position on the subject is controversial and the arguments for and against the accounting to the assets of R & D costs, and its binding nature, are used by both sides.

The arguments for the capitalization are:

It is first of all to respect the principle of connecting loads to the products (or "matching principle"). R & D expenditure, in the case of a successful project, should be in relation to future periods where the benefits will arrive. Because of this,.

The capitalization of cost-effective R & D projects to bring the book value of a company of its fair value. It takes into account the prospects of future profits associated with this investment and thus increases the relevance of accounting information for the assessment.

The arguments against the capitalization of R & D expenses:

The future economic benefits of the R & D can not be defined with enough objectivity, and he was not sure that they will return to the company at the time when it committed R & D expenses to justify capitalization. In this case, the precautionary principle led to record these costs as expenses.

Even if the manager determines in good faith to join the active R & D project which he believes profitable, it may be not able to assess the future profitability of R & D project with reliability. The risk is that of a decrease in the reliability of accounting information.

What about the mandatory nature of the capitalization

If the standard is properly applied, only cost-effective R & D projects will be recognized on the balance sheet of the companies, which should improve the informative nature of the financial statements.

Mandatory capitalization should facilitate the comparability between the companies and avoid discretionary choices on the part of managers.

However, mandatory capitalization of cost-effective R & D projects requires the company to disclose a strategic information to its competitors.

Finally, the method of accounting for R & D can be seen as a way to reduce the asymmetry of information between managers and investors. The capitalization of R & D costs to distinguish between projects fulfilling the conditions of entry in the active (and therefore considered as "success") of those not fulfilling ("unprofitable" projects, because not fulfilling the conditions of registration for the assets). However, this mode of communication of information is imperfect, because it is also possible that registration for the assets of R & D expenses is used opportunistically by managers. Indeed, all things being equal, registration for the assets of R & D expenses decreased the lever of indebtedness (because it increases the equity) and allows to smooth the result. These two effects can be sought by leaders in opportunistic management of the result.

The responses by the research

The empirical results of many research conducted over the last 15 years can help us to inform this debate. Intangible items, including R & D, are often presented as a way to improve the relevance (or utility) (2) of the accounting information.

Empirical studies tend to agree on the appropriateness of the registration to the assets of the & d. Zhao R (2002) studied compared the relevance of the assets of the costs of R & D in France, Great Britain, Germany and registration in the United States. It shows that in countries where it is not possible to include R & D in the active (Germany, USA), the information published on the expenditures for R & D improves the usefulness of the results and accounting values for markets. It also shows that the allocation of the costs of R & D between charges and active provides more information than simple disclosure of the total costs of R & D (uniformly recorded as an expense). In the United States, Lev and Zarowin (1999) show that the variation of R & D intensity (R & D/sales) bring significant additional information and that it is necessary to control the sectoral effects in any research on the accounting treatment of R & D, because these expenditures by sector-specific nature. Similarly, Aboody and Lev (1998) show that the costs of development of the software included in the assets are positively associated with the course and stock returns. Callimaci and Landry (2004) find similar results in student registration to the assets of the R & D at the Canada, where the capitalization is required if the project meets the conditions of activation. Overall, these results suggest that the inscription on the assets of R & D costs, under certain conditions of success, is useful, because it acts as a positive signal to investors.

The French context presents a unique experimentation field for studying the usefulness of the capitalization of R & D, since the two accounting treatments are allowed (passage in charges and asset registration). Results of French studies on the capitalization of R & D (Cazavan-Jeny, 2004); Cazavan-Jeny and Jeanjean, 2005, 2006) contrast with those carried out in a North American environment. They show that R & D capitalized is negatively associated with the course and stock returns, indicating that investors take into account the information contained in the R & D capitalized and the value negatively. These results suggest that, in France at least, the control structure on the leader does not preclude an opportunistic use of capitalization, and that this opportunism is expected by the users of financial information. Another interpretation is that managers, even if they are the active R & D in good faith, are not able to discriminate cost-effective R & D programs and unprofitable projects. It is also possible that the leaders did not activate cost-effective R & D projects to not disclose strategic information. In France, the reliability of the capitalization of R & D, which remains an accounting choice, seems questioned.

The results of these studies are interesting because they bring elements of response to arbitration relevance-reliability for "reporting" of R & D financial and accounting. Registration for the assets is a priori relevant, because there are two distinct methods to deal with projects of R & D cost and failures. However, registration to the assets is not reliable, because it is subject to the discretion of manager (commercial and/or technical project success is not easily verifiable). This lack of reliability can affect on the relevance of the capitalization and may be in contradiction with the principle of prudence. Processing loads features reverse: consistent treatment of R & D expenses (regardless of success) is reliable and consistent with the principle of prudence, but irrelevant, as it does not disclose to the market information on the chances of success of R & D projects.

Differences in results between these studies also show that the institutional context should be taken into account in assessing the relevance of accounting standards. Therefore, it is legitimate to question the deletion of the optional character of the capitalization of the cost of French R & D for listed companies. This will allow to increase the reliability of the accounting information Indeed, the capitalization is a first step towards an improvement of the relevance of accounting and financial information. But the French example (option) shows that this can be at the expense of reliability. It is then possible that the application of international standards clerk, since they make it mandatory capitalization of "profitable" R & D costs and they impose tests "impairment", to return to R & D assets who have lost their value.