Research and development falls under the spotlight in recent company reports. Pharmaceutical company Protherics adopts an innovative practice for what it terms research & development stocks.
Distinguishing its R&D stocks from its R&D costs, Protherics states they are written off to the p&l account as incurred, and reinstated as appropriate when the related products are brought into commercial use. This results in the R&D charge for the year being reduced by Pounds 1.3m, arising from the current year reinstatement of stock written off in the prior years.
SSAP 13: ‘Accounting for research and development’ permits the deferral of development costs or requires immediate write off. Protherics’ policy of write off with subsequent write back is not addressed. The company goes on to tell us that its practice is commonplace within the pharmaceutical sector. If it is, it is certainly not being disclosed.
SSAP 13 does not preclude this practice, the company points out, but the last company to use the ‘does not preclude’ argument in respect of accounting standards, Artisan UK, found itself in discussions with the Financial Reporting Review Panel. In its defence, Protherics’ policy is prudent and matches the R&D cost with the associated revenue.
If it is common practice, SSAP 13 needs to ratify the R&D stocks scenario as generally accepted accounting practice. However, if it is not accepted into GAAP, then Protherics may find itself in discussions with the Panel.
Independent Insurance liquidation
The liquidation of Independent Insurance has knock-on effects for two companies this month. Ranked as an unsecured creditor, land reclamation company VHE assumes that it will receive no distribution from the liquidators and raises an insurance claims provision of Pounds 300,000. On a similar note, Worthington is left with Pounds 3m of a Pounds 8.5m claim unpaid.
FRS 18: adoption disguises FRS 15 lapse
Plant and machinery hire company Ashtead has changed its accounting policy for recognising trade discounts received on equipment purchased.
Previously, the discounts were taken to the profit and loss account when the assets were purchased. But now the discount is deducted from the cost of the asset acquired.
Ashtead states that it has changed its policy to follow FRS 18 ‘Accounting policies’, although following the Northgate affair, we suspect that the real reasons behind the change is to bring Ashtead into line with FRS 15: ‘Tangible fixed assets’. FRS 15 states that any trade discounts and rebates should be deducted from the cost of an asset.
Like Ashtead, Northgate was taking its trade discounts to the profit and loss account. However, having had discussions with the panel, Northgate now deducts its trade discounts from the cost of the acquired asset.
FRS 17 out of favour with early adopters
Less than 1% of companies on our database have adopted FRS 17: ‘Retirement benefits’ early. Manufacturer Renishaw joins the exclusive club and discloses that it now charges to operating profit the increase in the present value of the defined benefit scheme liability.
Meanwhile the expected return on the scheme’s assets and the increase in the present value of the schemes’ liabilities arising from the passage of time is included within other finance income.
The result of the policy change is that Pounds 0.6m finance income is included in the p&l account.
And in the statement of total recognised gains and losses, Renishaw discloses that the actuarial loss recognised in respect of the pensions this year is some Pounds 1.7m.
Deferred tax asset discounted
More popular for early adoption is FRS 19: ‘Deferred tax’, which has been adopted by 3% of companies. Football club Celtic adopts FRS 19 and, with available tax losses of Pounds 8m less accelerated capital allowances of Pounds 3m, recognises a net deferred tax asset of Pounds 5m.
Celtic is the first company we have seen to discount its deferred tax. FRS 19 allows companies to decide for themselves whether or not to discount, stating that companies are permitted but not required to discount deferred tax assets.
The effect of the discounting is that Celtic’s net deferred tax asset is increased by Pounds 0.6m, which is made up of Pounds 1.9m decrease in the liability relating to accelerated capital allowances less a Pounds 1.3m increase relating to past losses.
Branching out into US GAAP
This month we see another company adopt US GAAP for its revenue recognition practice. Like Mondas that adopted the US GAAP’s SOP 97-2: ‘Software revenue recognition’, fellow software company Cedar has changed its revenue recognition principles and adopted those of US GAAP.
Cedar states it has accounted properly for revenue under UK GAAP but that it recognises also that US GAAP provides a more conservative standard for revenue. The company states that, where services are essential to the functionality of the software, or the payment terms are linked, the revenue for both software and services is recognised rateably over the implementation period.
Similarly, software rentals are recognised over the term of the agreement and service revenue is recognised as the services are performed with maintenance revenue spread over the life of the respective contracts.
Meanwhile, where services are not essential and payment terms not linked, revenue for licences to use Cedar’s software in perpetuity is recognised immediately.
Poor show for joint venture disclosures
In its operating review, keen to talk up its joint venture with the BBC’s Good Homes Shopping Guide, Planit states that the venture is expected to break even in the current year and contribute to profits next year.
However, in the financial statements there is no mention of any joint ventures.
It turns out the arrangement does not constitute a joint venture but instead ‘is seen more fairly as a joint arrangement that is not an entity (JANE)’, according to Planit. This may be true but we voice our concerns as companies should not be confusing the two different vehicles.
Further, FRS 9: ‘Associates and joint ventures’, requires companies to account for their own assets, liabilities and cash flows for JANEs. As FRS 9 is only interested on the minutiae of accounting for JANEs, ignoring disclosure issues, we will probably never see the performance of Planit’s JANE reflected in the financial statements.
On a different note, Budgens discloses that it invested some Pounds 0.6m in a joint venture. This is where Budgens’ joint venture disclosures finish, falling way short of the requirements of FRS 9 to disclose in the primary financial statements: (i) share of joint venture turnover; (ii) share of joint venture operating profit; and (iii) net interest in joint ventures with corresponding gross assets and liabilities.
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