Forschungs und entwicklungs­ausgaben

What Is Forschungs- und Entwicklungsausgaben?

Forschungs- und Entwicklungsausgaben (F&E), or Research and Development (R&D) expenses, refer to the costs incurred by a company in the pursuit of new knowledge or the creation of new products, processes, or services, or significant improvements to existing ones. Within the realm of Financial Accounting, these expenditures are typically treated as Operating Expenses on a company's Income Statement, directly reducing current period Net Income. These investments are crucial for fostering Innovation and maintaining a Competitive Advantage in the marketplace.

History and Origin

The concept of formally accounting for research and development activities gained prominence in the mid-20th century as industrial economies shifted towards more knowledge-intensive production. Prior to standardized accounting rules, companies often had significant discretion in how they reported these costs, leading to inconsistencies. The Financial Accounting Standards Board (FASB) in the United States, through Statement of Financial Accounting Standards (SFAS) No. 2 (now codified as ASC 730), established the general principle that all research and development costs should be expensed as incurred. This rule, adopted in the 1970s, aimed to enhance comparability and reduce the potential for earnings manipulation, primarily due to the inherent uncertainty of future benefits from R&D activities. FASB ASC 730 mandates expensing these costs, arguing that future economic benefits are too uncertain to warrant capitalization.

Key Takeaways

• Forschungs- und Entwicklungsausgaben are costs incurred by a company for new product or process development, expensed in the period incurred.
• They are reported on the income statement as an operating expense, reducing current period net income and Profitability.
• Despite being expensed, R&D is a critical investment for long-term growth and competitiveness.
• High or increasing R&D spending can signal a company's commitment to future innovation and potential for increased Shareholder Value.
• Investors often analyze R&D spending to gauge a company's future prospects and Strategic Planning.

Formula and Calculation

While Forschungs- und Entwicklungsausgaben are primarily a line item reported directly on the income statement, analysts often calculate R&D intensity to assess a company's commitment to innovation relative to its size or sales. A common way to express this is as a percentage of Revenue:

This formula indicates how much of each dollar of sales is reinvested into future growth through R&D. For example, if a company has Forschungs- und Entwicklungsausgaben of €100 million and revenue of €1 billion, its R&D intensity would be 10%.

Interpreting the Forschungs- und Entwicklungsausgaben

The interpretation of Forschungs- und Entwicklungsausgaben largely depends on the industry, company life cycle, and overall economic environment. Industries such as pharmaceuticals, technology, and biotechnology typically have very high R&D intensity due to the continuous need for new discoveries and product cycles. In contrast, mature industries like utilities or basic manufacturing may have significantly lower R&D spending.

Analysts often look at trends in Forschungs- und Entwicklungsausgaben over time. Consistent or increasing R&D spending, especially when accompanied by revenue growth, can indicate a healthy, forward-looking company. Conversely, a sharp decline in R&D might suggest a company is cutting corners, potentially sacrificing future growth for short-term Profitability or to improve reported Earnings Per Share. However, interpreting R&D requires nuance; effective R&D isn't just about the quantity of spending but also the quality and efficiency of the research efforts.

Hypothetical Example

Consider "TechInnovate AG," a hypothetical software company. In its latest fiscal year, TechInnovate AG reported €50 million in Forschungs- und Entwicklungsausgaben. These expenses covered salaries for its software engineers working on a new artificial intelligence platform, costs associated with prototyping new hardware, and fees for external research consultants.

When preparing its financial statements, TechInnovate AG recorded these €50 million as an operating expense on its Income Statement. If TechInnovate AG's total revenue for the year was €500 million, its R&D intensity would be 10% (€50 million / €500 million). This indicates that 10 cents of every euro earned by TechInnovate AG was reinvested into developing future products and technologies. This investment, while reducing current period net income, is expected to drive future revenue streams and maintain the company's competitive edge.

Practical Applications

Forschungs- und Entwicklungsausgaben are a crucial metric across various financial applications:

• Investment Analysis: Investors scrutinize a company's R&D spending to gauge its commitment to growth and innovation. Companies with a strong R&D pipeline are often seen as having better long-term prospects. For instance, recent data indicates that corporate R&D spending has reached record highs, reflecting companies' ongoing investment in innovation. Reuters on Corporate R&D spending
• Valuation: While R&D is expensed, its impact on future cash flows is significant. Analysts often adjust valuation models to account for the long-term benefits of R&D, treating it somewhat like an investment even though it's not capitalized on the Balance Sheet.
• Economic Indicators: Aggregated R&D spending across industries or nations serves as a key indicator of economic innovation and future productivity. The OECD R&D Statistics provide valuable insights into global innovation trends.
• Credit Analysis: Lenders may view consistent R&D spending as a positive sign of a company's ability to adapt and generate future earnings, which indirectly supports its debt repayment capacity.
• Government Policy: Governments often offer tax incentives or grants for R&D activities to stimulate economic growth and maintain global competitiveness. These policies can directly influence a company's decision to increase its Forschungs- und Entwicklungsausgaben.

Limitations and Criticisms

Despite its importance, the expensing of Forschungs- und Entwicklungsausgaben as incurred faces several criticisms and presents certain limitations for financial analysis:

• Understatement of Assets: By expensing R&D, companies do not recognize the future economic benefits of successful R&D projects as Intangible Assets on their balance sheet. This can lead to an understatement of a company's true asset base and potentially distort financial ratios, as the future value created by R&D is not reflected.
• Distortion of Profitability: Expensing R&D immediately can suppress current period Net Income, especially for companies heavily investing in growth. This might make a company appear less profitable than it is, given that these expenses are investments aimed at long-term gains.
• Lack of Comparability: While ASC 730 mandates expensing, different companies might categorize certain activities differently, or some R&D-related costs might be embedded in other operating expenses, making direct comparisons difficult.
• Management Incentives: The immediate expensing of R&D can create a disincentive for management to invest in long-term, high-risk projects if they are under pressure to meet short-term earnings targets.
• Valuation Challenges: Valuing companies with significant R&D is complex because the capitalized value of future R&D benefits is not explicitly stated on the financial statements. Analysts often need to make significant adjustments to traditional valuation models to account for this. Valuation experts like Aswath Damodaran discuss the inherent difficulties in accurately valuing the impact of R&D on a company's future. Aswath Damodaran on R&D Valuation

Forschungs- und Entwicklungsausgaben vs. Capital Expenditures

Forschungs- und Entwicklungsausgaben (R&D expenses) and Capital Expenditures (CapEx) are both investments a company makes for its future, but they differ significantly in their accounting treatment and nature.

The primary distinction lies in the certainty of future benefits. R&D efforts often fail or do not yield commercially viable products, making their future economic benefits highly uncertain. Therefore, standard accounting practices mandate immediate expensing. In contrast, capital expenditures create tangible assets with a more predictable useful life and economic benefit, allowing them to be capitalized and their cost spread out over time through Amortization or depreciation.

FAQs

Why are Forschungs- und Entwicklungsausgaben expensed and not capitalized?

Forschungs- und Entwicklungsausgaben are generally expensed because the future economic benefits of R&D activities are highly uncertain and difficult to measure reliably. Unlike tangible assets acquired through Capital Expenditures, the success of research projects is not guaranteed, and linking specific expenditures to future revenues can be challenging.

How do Forschungs- und Entwicklungsausgaben affect a company's profitability?

Since Forschungs- und Entwicklungsausgaben are treated as an Operating Expenses on the Income Statement, they directly reduce a company's reported Net Income and profitability in the period they are incurred. While this lowers current earnings, these expenditures are investments intended to drive future revenue and profitability.

What is a "good" level of Forschungs- und Entwicklungsausgaben?

There isn't a universally "good" level of Forschungs- und Entwicklungsausgaben; it is highly dependent on the industry. Industries like biotechnology or software often require substantial R&D to remain competitive, while others, such as utilities, have minimal R&D needs. Analysts compare a company's R&D spending to its peers and historical trends to determine if it is appropriate for its strategic goals and industry.

Can Forschungs- und Entwicklungsausgaben be seen on the Cash Flow Statement?

Yes, while Forschungs- und Entwicklungsausgaben are an operating expense on the income statement, they represent a cash outflow. Therefore, these expenses are reflected in the Cash Flow Statement as part of the cash flow from operating activities, typically as a deduction when using the indirect method.