Ollowingis a footnote excerpt from pfizers 2010

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-=ollowingis a footnote excerpt from Pfizer's 2010 annual report related to its research and pment expenditures: ~arch and development (R&D) costs are expensed as incurred. These expenses include the s of our proprietary R&D efforts, as well as costs incurred in connection with certain licensing =mrngements. capitalizes and depreciates general research facilities (those with alternate uses). All other osts are expensed as incurred. sis of R&D R&D expenses are large, such as that for technology-based and pharmaceutical companies, ion arises as to how we should treat those expenses in our company analysis. If R&D out- expected to yield future benefits, companies would (conceptually) understate assets and because GAAP requires expensing of R&D outlays. One approach is to capitalize and ~e the reported R&D expenses. To illustrate, assume that a company reports the following statement: Sales . . . . . . . . . . . . . . . . . . . .. $500 Expenses other than R&D . . . . 350 R&D expenses .. . . . . . . . . . . 100 Net income (per GAAP) . . . . .. $ 50 assume that R&D expenses create economic benefits over the next five years. Accordingly, thod would treat the $100 R&D expenditures as an asset and amortize it over its useful pecifically, the adjusted balance sheet would reflect the $80 of unamortized R&D assets ~=-n1·mg, computed as $100 in R&D asset less $20 in R&D amortization (current-year equity - 5)80greater from the $80 of expenses postponed to future years). The adjusted income ent would reflect the $20 amortization of the $100 R&D asset as follows (computed as - years): Sales . . . .. . . ... .. .. .... .. $500 Expenses other than R&D . . . 350 R&D amortization . . . . . . . . . 20 Net income . . . . . . . . . . . . . . . $130 adjusted income makes the company look more profitable than GAAP would. (However, if rompany is not experiencing abnormal growth and the $100 annual R&D expenditures continue , then after the five-year initial amortization period the R&D amortization in the adjusted e statement will approximate the R&D expenses in the GAAP income statement.) While this analysis might be conceptually appealing, it has problems. First, determining the rtion of R&D expenses that creates future economic benefits is extremely subjective. GAAP e statements do not distinguish between research and that of development and, instead, them as one combined item. As users of financial reports, we have little basis to make such ocation, let alone decide if outlays meet certain criteria. Second, there is considerable judg- in determining the period over which future economic benefits will occur. Some intangible such as patents are protected for specific lengths of time, but most other intangibles have such defined period of potential benefit. Third, the manner in which future benefits will be ed is uncertain, so amortization of an R&D asset would be arbitrary. A straight-line method In our example above) would be easy, but would it reflect the asset's pattern of use?
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