research and development costs, are supposed to be expensed; if capitalized, it might an indicator of low quality of earnings. Correct? But when calculating NOPAT, to get cash flows, we should capitalized them. I think I understand the reasons of each situation: in NOPAT is because R&D would probably generate future inflows; and when analyzing the quality, the “probable” isn’t enough, because we are talking about the present earnings, not future or expected ones.
Being almost 2 days from the exam, I really don’t need the logic behind, just want to make sure I understood things right.
ive never heard of it.
so we expense R&D costs, but include them in calculating NOPAT?
May be I expressed my self wrong… I’m referring to the adjustments needed in NOPAT, to calculate a Residual Income (Reading 33, of Equity). In that case, R&D are capitalized and amortized instead of expense. I believe the reason is that expense them all together at once, would be very “severe” or “harmful” to the NOPAT. In other words, at some point in the future, probably at least a portion of that costs will generate an increase in Earnings, more than expected. So expensing them would decrease RI, implicating a lower Firm Value compared to the case in which future earnings effectively increase (due to R&D).
I insist, these is my logic, but I’m not 100% sure of it. What makes me doubt, is that capitalizing them would be considered low quality earnings.
reporting-wise, yes, capitalizing R&D is frowned upon (remember level 1) but portions of R&D can be capitalized under IFRS iirc.
Thanks Edbert! So I guess I was right…