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Please read the instructions below carefully.
HBS Case 9-111-114: "Bridging the GAAPs" – write up including answers to the case questions on page 6 and supporting analyses.
Dear Students,
A few issues have come up, and to make sure that everyone knows what we
are doing with this case, here is some clarification:
Issue 1: What do we need to do?
From the syllabus: "write up INCLUDING answers to the case questions on page 6 AND supporting analyses":
Specifically, second paragraph of page 6: " [1] Should HOLT continue
to fully recapitalize all R&D expense, or capitalize only development
expenses, as required by IFRS? [2] Which adjustments would better reflect
economic reality? [3] Would the different treatment affect how HOLT’s
clients viewed Sanofi and Fiat? "
Issue 2: What is the difference between research and development
expenditures in [1]?
R&D are all expenditures associated with coming up with and creating
new products, or coming up with new ideas that simplify things. R&D
group may involve scientists in lab coats at a pharmaceutical company, or
a group of theoretical physicists working on a mathematical formula for a
more efficient car heating system…
Let’s think of a new invention called "Gizmo".
Expenditures on a "Gizmo" stop being research and start being
development when it is almost certain that the "Gizmo" will work.
When the company starts working on "Gizmo", all of the money it
spends goes to an expense until the company is almost sure that
"Gizmo" will work.
When the company determines that it is almost certain that Gizmo will
work, and the company continues spending money to finish
"Gizmo", that newly spent money is capitalized. This may include
final touches, making sure that "Gizmo" will look good and be as
efficient as possible (i.e. more money spent, but not production yet).
Note that the costs that were initially expensed cannot be capitalized.
This distinction should be sufficient for the case.
[To find the distinction between expensing and capitalizing, please review
the class notes from the beginning of this semester]
<<
Additional information, perhaps more than you need for the case, but in a
formal definition:
IFRS defines money spent on R&D as "development" when ALL of
the following criteria are met: technical feasibility of completing,
intention to complete, ability to use or sell, future economic benefits
are expected, resources are available for completion, the company is able
to reliably measure the costs associated with the development.
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