The development costs of a company are those costs incurred through the process of developing improved or new goods and services to meet consumers’ needs and, ideally, increase the company’s profits. Most U.S. companies adhere to generally accepted accounting principles in their accounting practices. However, a transition to international financial reporting standards has been slowly taking place since 2008. There are a few noteworthy differences in the handling of development costs under IFRS and GAAP. This requirement applies whether an intangible asset is acquired externally or generated internally. IAS 38 includes additional recognition criteria for internally generated intangible assets (see below).
When an intangible asset is disposed of, the gain or loss on disposal is included in profit or loss. After initial recognition, an entity usually measures an intangible asset at cost less accumulated amortisation. It may choose to measure the asset at fair value in rare cases when fair value can be determined by reference to an active market. Both accounting standards recognize fixed assets when purchased, but their valuation can differ over time.
Excluding nonoperating costs, profit before tax would have been € 5.9 billion in the first nine months of 2023, up 19% from € 5.0 billion in the prior year period. Post-tax profit in the first nine months was € 3.5 billion, down 6% year on year; the year-on-year development reflected higher nonoperating costs and an effective tax rate of 30%, compared to 24% in the prior year period. Research and development expenses related to intangible assets, are regulated in paragraph 52 of IAS 38. If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only. IAS 38 was revised in March 2004 and applies to intangible assets acquired in business combinations occurring on or after 31 March 2004, or otherwise to other intangible assets for annual periods beginning on or after 31 March 2004. US GAAP and IFRS are the two predominant accounting standards used by public companies, but there are differences in financial reporting guidelines to be aware of.
If the asset has a future alternative use, it becomes a capitalized asset, meaning its cost will be depreciated over its useful life and the amortization costs are expensed. If the asset does not have a future alternative use, its cost is expensed upon acquisition. GAAP and IFRS are fundamentally similar, differences do exist that may affect our analysis of company financial accounting for research and development statements. To illustrate, we compare research and development (R&D) accounting methods under both sets of standards and illustrate how they affect the analysis of financial results of firms in a specific industry—automotive manufacturers. Our results provide insight into settings in which differences in R&D accounting may have the greatest impact on financial analysis.
For the first nine months, net revenues were € 22.2 billion, up 6%, and up 8% ex-specific items. Post-tax RoTE¹ for the first nine months was 7.0%, compared to 8.1% in the prior year period, and post-tax RoE was 6.3%, down from 7.2% in the prior year period. The year-on-year development in both ratios reflected the aforementioned rises in the tax rate, total equity, and AT1 coupons compared to the prior year period. Third quarter post-tax profit was € 1.2 billion, down 3% compared to the prior year quarter. The year-on-year development reflected an effective tax rate of 30% in the quarter, compared to 23% in the prior year quarter which benefited from the geographical mix of income.
For US GAAP, all property is included in the general category of Property, Plant and Equipment (PP&E). Under IFRS, when the property is held for rental income or capital appreciation the property is separated from PP&E as Investment Property. As such, the same scenario can lead to differences in the recognition, measurement and even disclosure of contingent liabilities if the company was reporting under US GAAP or IFRS. US GAAP requires that interest expense, interest income and dividend income be accounted for in the operating activities section, and dividends paid be reported in the financing section. Expect future articles addressing the definition of a business under finalized amendments to IFRS and any differences from US GAAP, and the accounting for IPR&D. Environment, Social and Governance (ESG)-related financing and investment volumes² were € 11 billion ex-DWS in the quarter, bringing the cumulative total since January 1, 2020 to € 265 billion, including € 50 billion in the first nine months of 2023.
Research costs under IAS 38 are expensed during the accounting period in which they occur, and development costs require capitalization if certain criteria are met. Adjusted costs are calculated by deducting (i) impairment of goodwill and other intangible assets, (ii) net litigation charges and (iii) restructuring and severance, in total referred to as nonoperating costs, from noninterest expenses under IFRS. From an economic perspective, it seems reasonable that research and development costs should be capitalized, even though it’s unclear how much future benefit they will create.