Renewable and Sustainable: Accounting Theory and Current Issues

Bio Sustainable Feeds (BSF) Ltd, Australian firm engaged in the research and development of aquaculture feeds on plant and fish based feeds since almost two decades investing AUD $360 million in the year 2016. However, the research was not hundred percent successful and consequently AUD $120 million exhausted because of the demolishment of high value fish. Apart from that, approximately 30% of the total weight of high value fish died in the process of research other than the 5% of death in low value fish.

With the given information, the significant problem of the research reflected in diversion of quality in growing the food crops for human consumption. Such diversion was due to conversion of low value fish feeds into high value fish feeds that demolishes the quality and protein content of the fish. Another problem with the research was that the conversion of fish feed would incur huge costs for research and development process and accordingly, the crops would be available at high costs. Hence, it would be beneficial for rich society and not for the moderate or meager society and might put them at risk of undernourishment. Fish farming is a hectic procedure with regard to procedure of breeding the high value fish that contains protein, fiber and carbohydrates for serving the food crops for consumption of human society. Apart from that, sea plant farming is also considered to be critical and complex procedure with respect to the extraction of seeds, edible crops. Both the farming involves high cost of research and development to get a fruitful result (Jassim, Limoges and El-Cheikh 2016).

 Bio Sustainable Feeds (BSF) Ltd also faced the similar problems during its research process for the plant feeds and fish feeds. The initial cost of research included AUD $360 million which could not be utilized to the extent of AUD $120 million. Further, the firm expected to incur a cost of around AUD $200 million for the development process. Such high costs and complexities in the research and development process for aquaculture feed creates problem in accurate and effective result. Along with the high cost structure, the research on aquaculture is also time-consuming. BSF Ltd. is engaged in the research process since two decades that involves the conversion of low value fish into high value fish along with the plant based feed.

Moreover, the research process also involves approval of Food and Drug Administration of the respective territory, which can also be time- consuming. Hence, the problem of research for BSF Ltd also incorporates the necessary legal approval from the authorities. The research process should be done by considering the safety measures of the sea breeds to maintain the quality of food crops for human consumption. Therefore, BSF Ltd. needs to consider these major problems with respect to the research process of various feeds of aquaculture. 

Nature and differences between Research & Development

Research and Development is a process of Business Corporation that involves investigative activities a company or firm conducts to enhance its existing goods and services or for incorporating new business. Research and development is a process of finding and implementing the concepts, processes and designs of the goods and services to operate the business (Shukla 2015). 

Differences between Research and development

Research process involves investigation and discovery activities for new products and services and for existing products and services to develop with new features. On the other hand, development involves the process of implementing the research work to the products and services. Research is a phase associated with the discovery of the concepts of a product life cycle whereas, development is associated with entire process of planning, designing, creating, modifying and marketing of the new or existing products and services (Blevitt et al. 2016). Further, research is a process that includes exploring and study of the ideas, knowledge and concepts for various subject matter, products or services. Besides, development involves executing the findings of research work to produce the goods and services. Research process is the initial step to be followed by a business that is followed by development processes (Moses et al. 2015).

Accounting of R&D

Australian Accounting Standards Board (AASB) 138 Intangible Assets regulates the accounting of Research and development costs. The standard states the costs included to record in books of accounts if the following elements are identified:

• The cost of materials and services used in the process of research
• Salaries, wages or commission or any other costs related to research work
• Depreciation charges of the equipment used
• Any other costs that is directly attributable to the research work.

According to the AASB, any costs related to Research and development should be recognized in the books of accounts as expenditure incurred except the amount of deferment as incurred during the phase of research and development. Further, costs incurred during the period of research and development should be deferred to prospect years only if it produces future benefit. Such deferred costs are required to amortize over the future years of accounting in proportion to the use research process (Wagner 2015).

In case of receipt of Government Grant for the purpose of research process to meet the costs which have been deferred, such amount received as government credit should be deducted from the carrying value. If the grant received with respect to the research and development expenses written off, the amount received should be credited in the profit and loss account (Hein et al. 2015).

Following disclosures with respect to research and development should be made in the financial statement:

• Deferred amount of research and development costs at the end of the accounting period and
• The basis on which deferred costs of research and development have been amortized.

Reasons of difference

Many companies and entities are engaged in the process of research and development to take on new and uncertain projects either to start the business or to expand the same. Since the corporate infrastructure and other business elements in the entities or firms are large in number, it becomes difficult to differentiate research and development components. Differentiation between research and development process and costs reflects a clear picture of investigated and discovered resources, costs and outcomes. Further, according to International Financial Reporting Standard (IFRS) 38 capitalization of research cost is permissible but the cost of development is allowed to capitalize partially. It states that the development cost can be capitalized for the equipments or processes until the period they actually put into use. Hence, it is essential to categorize research and development for transparent and efficient recognition in the financial statements (Endraria 2015).

Reason of engaging in R&D

Firms acquire competitive advantage to procure unique ways of operating business and producing goods, which requires good amount of investment in research and development. It provides the organization with “Unique Selling Point (USP)” and right to posses patents which is a legal protection to prevent the chances of producing duplicate products by other companies. Research and development investments also provide benefits for tax credits, new opportunities, and enhanced reputation (Komori 2015).

Fair market value patent

Patent is an intellectual property falls under the category of Intangible assets related to technology that many organization use. It is an intangible asset since it does not have physical essence and it provides long-term value to the owning firm. Valuation of patents is an important and critical activity for the management of the companies since it helps in taking strategic decisions for assets as well as commercialization of products. Therefore, patents should be valued and recognized at fair amount and in accordance with Australian Accounting Standards Board (AASB) 138 as well as International Financial Reporting Standard (IFRS) 38 Intangible Assets (Han and Sohn 2015).

There are different methods of valuation of patents like cost-based method, income based method, market based method and option based method (Suh 2015). However, AASB 138 specifies that the patent should be recognized at the initial stage whether purchased or self- created if the following conditions are satisfied:

• It is apparent that the future economic profit attributable to the company’s assets will flow into the company and
• The cost or value of asset can be measured accurately.

If an intangible asset is with finite useful life, then the cost of patents is to be amortized over useful life with zero residual value. Additionally, the amortized period and method are subject to review at the end of each accounting year. Further, if the patent no longer provides the economic benefit or if it provides lower value, then it should be reviewed for impairment and accordingly carrying cost of the patent should be decreased (Mauck and Pruitt 2016). 

However, according to International Financial Reporting Standard (IFRS) 38, the recognition and measuring the value of patent is in accordance with the year of amortization period. The residual value of patents shall be presumed as zero and the amortizing amount of future years shall be determined at present value by using appropriate discounting rate. Along with that, the organization is required to review for any impairment from time to time. If there is any impairment loss is determined then the carrying amount should be decreased by the value of impairment loss. In order to determine the impairment of intangible asset the management is required to examine the internal as well as external indicators (Jun, Park and Jang 2015).

In the given case study, Bio Sustainable Feeds (BSF) Ltd, the expected net market value of the patent is AUD $ 700 million if it is sold in 2 years or AUD $ 200 million each year having the useful life of 10 years.

Expected net market value of the Patent	Amortized period	Discount rate	Amortization Amount- year 1	Amortization Amount- year 2	Adjusted Amount in the accounting year
$ 700 million	2 years	8% p.a.	350	324.1	350
$ 200 million per year for 10 years if produced and sold and adjust for two years	10 years	8% p.a.	200	185.2	385.2

Table 1: Valuation of Patent

(Source: Created by author)

If the patent is used for 10 years, the total expected market value would be AUD $2000 million but the amortization value is to be adjusted for two years. According to AASB 138, the initial cost of patent is measured only if it is probable that the future economic benefit will flow to the entity. Apart from that, BSF is engaged in research work for two decades so it would be appropriate for the firm to consider a patent having 10 years of useful life. Therefore, the fair market value of the patent would be AUD $2000 million with 10 years of useful life is AUD $1311 at discounting rate of 8%.

Market value-Each year $ million	Discounting factor 8%	Present value $ million
200	0.926	185.200
200	0.857	171.400
200	0.794	158.800
200	0.735	147.000
200	0.681	136.200
200	0.630	126.000
200	0.540	108.000
200	0.500	100.000
200	0.463	92.600
200	0.429	85.800
Total	6.555	1311.000

                                                                                            Table 2: Fair value of Patent

(Source: Created by author)

Journal entries for the R&D transactions from 2013 to 2016

Journal entries for the research and development transactions in the books of Bio Sustainable Feeds (BSF) Ltd from the accounting year 2013 to 2016 are as follows:

Year	Particulars	$ AUD million
		Dr.	Cr.
2013	Bank A/c                                         Dr.	500.00
	To Government Grant Received A/C		500.00
	(Being government grant received from Commonwealth Scientific and Industrial Research Organization for research and development work in the year 2013)
Year 1	Research & Development cost           Dr.	340.00
	To Bank A/C		340.00
	(Being the amount spend on research work during the year 2013 to 2016)
Year 2	Research & Development cost           Dr.	160.00
	To Bank A/C		160.00
	(Being the amount spend on research work during the year 2013 to 2016)
2016	Research & Development cost           Dr.	360.00
	To Bank A/C		360.00
	(Being the amount spend on research work during the year 2016)
2016	Loss on Research & Development      Dr.	120.00
	To Research & Development A/C		120.00
	(Being the amount of research work lapsed because a high value fish could not thrive during the research work)
2016	Equipment A/C                                   Dr.	200.00
	To Research & Development A/C		200.00
	(Being development cost for research work expected to incur has been capitalized)
2016	Patent A/C                                          Dr.	1,311.00
	To Bank A/C		1,311.00
	(Being fair market value of Patent with estimated useful life of 10 years has been capitalized during the year)
2016	Amortization Expenses A/C                 Dr.	385.20
	To Patent A/C		385.20
	(Being value of Patent has been amortized in proportion to the useful life of 10 years and adjusted for two years)
2016	Profit and Loss A/C                            Dr.	385.20
	To Amortization Expenses A/C		385.20
	(Being amortized expenses of patent has been transferred to Profit and Loss A/C during the year)

Table 3: Journal Entries

(Source: Created by author)

According to the principles and standards of Australian Accounting Board, any grant received from the government is recognized only if such grant is actually received by the entity and fulfils the condition attached to the grant. According to principles of AASB 138, amount of grant received shall be recognized as an income during year. In the present situation, BSF Ltd received AUD $500 million on the condition of spending at least AUD $100 million during the year. Since, the company has incurred AUD $340 million and AUD $160 million during the period of three years, the amount of grant received from Commonwealth Scientific and Industrial Research Organization (CSIRO, Federal Government of Australia) shall be recorded in the year 2016.

Further, the company expected to spend AUD $200 million as development cost during the year, it shall be capitalized with research and development account in the year 2016. However, the mode of expense is not clearly mentioned in the case therefore the amount has been capitalized against equipment based on the assumption.

With respect to the valuation and accounting of Patent acquired by BSF Ltd, patent with expected net market value AUD $200 million per year having useful life of 10 years has been considered. According to AASB 138 and IFRS 38 on Intangible Assets, the value of patent is recognized at fair market value, if available and shall be amortized in proportion to its useful life. The value of patent with useful life of 2 years is not considered because in general terms, patents have longer useful life. Hence, the present market value of Patent having 10 years of life is recognized and measured using discount rate of 8%. Additionally, the value of Patent has been amortized in the proportion of its useful life of 10 years but the same has been adjusted for two years as per the requirement of the given case.

Assertion

Patent is an exclusive right and intellectual property granted by the ruling state to an investigator for a finite period on disclosing the complete details of the invention and research work. Patent is a right that distinguishes the process of production or products from that of others with respect to the designs, process and production of goods and services. It is an Intangible asset granted by the regulating government on verification of the viability and authentication of technology used by the inventor for the research work (Kanodia and Sapra 2016).

In the given case study, Bio Sustainable Feeds (BSF) Ltd, a bio- research firm acquired patent for the purpose of research on sustainable aquaculture feeds based on plant and fish feed since two decades. The management of the firm contended that the value of patent was predicted on the basis of exclusive control over the technology used for the research of bacteria- based feed. The values of patent is required to be derived by considering various aspects like economic analysis, technological processes, business of firm and purpose of research work. It should be valued on the basis of the purchased cost or fair market value whichever is evident and clearly available. BSF Ltd is engaged in the bio- research to generate and improve the quality of food crops using sea plants and sea fish. The firm works on the process of conversion of low value fish into high value fish, which involves critical technological research process.

Further, the firm incurred loss on conversion process and expected to incur another AUD $200 million for the purpose of development. According to the principles of Australian Accounting Board and Patent Law Board, the valuation of patent is done by considering the cost approach, income approach and market value approach. Cost approach involves the replacement cost of the value of patent. In other words, the cost of replacement refers to the value a prospect buyer would be willing to pay at present, to replace such item. On the other hand, income approach states that the value of patent will be determined using present value of incremental cash flows for the useful life of patent. The present value of the patent is determined using a prevailing discount rate.

Firms consider market value approach for the valuation of patents, if the other two approaches i.e. Cost approach or income approach are not ascertainable. This approach is considered only if the fair market value is clearly and reliably ascertainable. Further, the firms should consider market value if there are proper and authenticated evidences available for such valuation (Strumickas and Valanciene 2015).

Therefore, the contention of BSF Ltd. management is partially correct because they predicted the value of patents based on the exclusive control over the technology of bacteria based feeds. The management is required to value patents based on the incremental cash flows or cost approach in accordance with the AASB and IFRS. It is given that the expected net market value of the patent is based on two useful lives 10 years and 2 years. Patent with 2 years of useful life is valued at AUD $700 million and with 10 years it is valued at AUD $200 each year. Considering the principles and standards of International Accounting Board, Patent is valued at 10 years of useful life with AUD $200 million each year, which was measured at AUD $1311 million as present value.

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