The irony of R&D expenses

Development expenses under IFRS rules must be CAPITALISED. Development expenses in USA under FASB standards must be EXPENSED. Yet ironically pharmaceutical companies treat development expenses in the same way.

I examined the financial statements of four large pharmaceutical companies in USA and four in Europe and compared their treatment of development expenses. [1] US companies start their section of accounting policies with a clear statement like this one:

“Research and development expenses are expensed as incurred.”

European companies usually have something like this:

 “Research expenditure is charged to profit and loss in the year in which it is incurred.”

The word ‘development’ is missing in the European companies.  They go on to explain that they capitalise development costs when the six criteria of IAS 38 Intangible Assets are met. Sanofi are the most emphatic adding the phrase ‘if and only if’ to show their studious application of the standard, and they list in detail the six criteria they follow, perhaps to convince the reader of their diligence.

But then the European companies put in their disclaimer which ensures the treatment of development expenses is similar in practice to FASB standard – ASC 730, Research and Development.

“… the criteria for capitalisation as intangible assets are not met prior to obtaining marketing approval by the regulatory authorities in major markets.”

So nothing is capitalised until the regulatory authorities officially approve the medicine or medical devise. But by then the product is complete and clinical trials have shown the benefits. So no more development costs are needed. They have already been expensed.

But they leave the door open to capitalise if they want to. After all, the standard insists. Some add the word ‘usually’ not capitalised (Sanofi and Glaxo Smithkline ) or ‘almost invariably’ not capitalised (AstraZenica). Only the Roche Group is categorical, they never capitalise development expenses prior to obtaining approval of regulatory authorities.

I will not speculate on whether the pharmaceutical companies have colluded to expense development costs in the same way as in the USA, or whether the European companies think capitalisation of development expenses is ridiculous.

Something is going on but I don’t know what.

[1] Europe – Glaxo Smithkline, Astra Zenica, Sanofi, Roche Groupe. USA-

Johnson & Johnson, Abbott, Abbvie, Bristol Myers Squib. (2021 Financial statements)