Financial Accounting Standards

BACKGROUND REVIEW ON THE DEVELOPMENT OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 2: ACCOUNTING FOR RESEARCH AND DEVELOPMENT COSTS

One of the first tasks undertaken by the Financial Accounting Standards Board (FASB) following its establishment in 1973 was to place "on its technical agenda a project on 'Accounting for Research and Development and Similar Costs'" (Financial Accounting Standards Board, 1974, p. 9). The project was placed on the Board's technical agenda in April 1973. The Board noted that, in 1972, total research and development expenditures in the United States approximated $30 billion, of which approximately $20 billion were made by business enterprises. The remaining research and development expenditures were made by government, research universities, and other non-profit organizations. The Board also noted that, in 1973, a wide variety of alternative accounting and reporting practices were followed in the United States by business enterprises with respect to research and development expenditures.

Both the economic significance of research and development expenditures in the for-profit sector of the economy and the diversity of the accounting and reporting practices applied to these expenditures prompted the Board to place the "Accounting for Research and Development and Similar Costs" project on its technical agenda. The scope of the "project encompassed accounting and reporting by companies in the developmental stage" (Financial Accounting Stand

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ment and Similar Costs" project was issued by the Board in December 1973, and public hearings on the Memorandum were conducted by the Board in March 1974. During the public hearing phase, the "Board received 74 position papers, letters of comment, and outlines of oral presentations � and heard 14 oral presentations �" (Financial Accounting Standards Board, 1974, p. 10). In the Discussion Memorandum, the FASB relied on National Science Foundation (NSF) definitions for (1) research and development, (2) basic research, (3) applied research, and (4) development. The Board thought that the NSF definitions had "the advantage of being relatively widely used and understood" (Financial Accounting Standards Board, 1974, p. 12). The major disadvantage associated with the NSF definitions were that they were "oriented primarily to research in the physical and biological sciences," and excluded "research in the social sciences" (Financial Accounting Standards Board, 1974, p. 12). Respondents to the Discussion memorandum recommended changes to the definitions before they were incorporated into a financial accounting standard. Service sector business enterprises in particular wanted the definitions expanded to include research and developme

Category: Business - F