Volvo Group- research and development costs
Volvo’s research and development expense include costs such the cost of developing new products, production systems as well as software. New product development costs also include the cost of market research, formulating and design of the products. Besides, research and development costs include the expenditure on improving the existing products. In this case, it incurred research and development in developing new as well as improving existing products such as buses, construction equipment, among other products. Others may include research to gain new knowledge, cost of evaluating alternatives, among other costs.
Factors considered in classifying R&D expenses
Certainty of the expected benefits: If the group is certain of the future benefits expected from the R&D expenditure, the expenditure is capitalised. If benefits are uncertain, they are expensed in the income statement.
Technical functionality: R&D expenses on a project is capitalised if it is proven prior to the development that the project, product or software is technically functional.
Amount: Materiality concept applies in classifying R&D expenses. If the amount of R&D is insignificant, they are simply expensed in the income statement in the year in which the firm incurs them. However, substantial amounts of R&D are capitalised and amortised annually when the project reaches the industrialization phase.
Factors considered in determining the amortization period
Expected useful life of the product or project developed: The amortization period is the estimated useful life of the product, software or project developed. For instance, a software has a shorter economic life hence the amortization period for R&D on software would be shorter than that on products such as trucks and construction equipment.
Company policy: The Company can follow its predetermined amortization period for different products.
IFRS and US GAAPs
The benefits of most R&D costs accrue over a long a period. Therefore, they should be capitalized if such benefits are certain (Kimmel, Weygandt and Kieso 417). Capitalizing the cost enables the company to match the revenues with costs. Expensing all R&D costs does not reflect the accrual of the associated benefits. Therefore, IFRS financial statements better reflect costs and benefits of R&D expenditures.
Comparison of Volvo with Navistar
Completing the table:
R&D as a percentage of net sales
The above results indicate that Volvo spent more on R&D per unit of net sales from operations than Navistar in each of the three years.
Kimmel, Paul D, Jerry J Weygandt, and Donald E Kieso. Financial Accounting. Hoboken, NJ: John Wiley, 2009. Print.