R_D Accounting Henkel by pengxuebo

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									  R&D Accounting at Henkel


                Robert Risse
Internationales Bilanzrecht, Köln – 13.06.2008
Agenda


1) Setting the scene – basic principles


2) Henkel's approach to R&D accounting


3) Industry examples


4) Conclusions




  2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)   2
1.1) Reflection of R&D in main
     financial statements

 P+L: Research and development expenses
 Balance Sheet: Research and development results

                  Goodwill
              Patents, Trademarks
            Proprietary Technology                          Equity
                      Software
                  Customer lists
            Contracts, Licenses …


              Fixed Assets                                  Debt
          Working Capital

  2008   Henkel AG & Co. KGaA      Global Tax Group (FCS)            3
 1.2) Accounting for R&D


  "Apparent paradox": R&D costs are expensed in the period incurred,
   although those costs are considered an investment in
   future products / materials / processes etc. (vs. "matching principle")
  IAS 38 provides the relevant framework for R&D accounting

                                     Intangible assets


          Acquired                                               Internally generated

 Separate                    Business
acquisition                 combination

          Other,                       Goodwill                    Other,           Goodwill
  e.g. patents, software                ( IFRS 3)         e.g. patents, software
   2008    Henkel AG & Co. KGaA   Global Tax Group (FCS)                                       4
1.3) Definitions
    R&D
   Knowledge-development focus
   May result in a physical asset (e.g. prototype /  secondary aspect)
   The "intangible component" is the primary R&D feature
   Research: Original, planned investigation to gain new scientific /
    technical knowledge and understanding
 Development: Application of research findings / knowledge for new /
    improved products etc., before commercial production or use


    Intangible asset characteristics
 Identifiable resource, non-monetary, without physical substance
 Control by the entity due to past events
 Expected future economic benefit
    2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)                   5
1.4) Recognition criteria for intangible
     assets
                                             Intangible asset

 Identifiability                                   Control                              Future econ. benefit
- Separable (vs. goodwill)                - Power to obtain future benefits               - Sales revenues
- Arising from legal rights / contracts   - Restrict other‘s access to those benefits     - Cost savings
                                                                                          - Other benefits from use


Criteria
 Probability of expected future economic benefit according to
  management best estimate
 Reliable (at) cost measurement for asset generation
Challenges
 Unambiguous intangible asset identification
 Probability prediction of future economic benefit realisation
 Reliable capture of relevant cost
  2008        Henkel AG & Co. KGaA         Global Tax Group (FCS)                                                     6
1.5) R&D as a source of intangible
     assets generation

                                                               Commercial
    Research                     Development                   production              Customer
     phase                          phase                        or use


 No indication of an intangible       Indication of an        Recognition criteria for intangible assets
  asset with expected future         intangible asset
                                                       1) Technical realisation feasibility
      economic benefit                      …
                                                       2) Intention to complete
                                                       3) Ability to use / sell
 No balance sheet recognition!     Mandatory balance  4) Demonstration of future economic benefit
                                   sheet recognition!  5) Availability of relevant resources
     R&D expense in P+L
                                                       6) Reliable measure of attributable expense


Challenges

 Unambiguous distinction of research vs. development phase
 Cumulative proof of all recognition criteria in development phase

  2008    Henkel AG & Co. KGaA    Global Tax Group (FCS)                                               7
1.6) Determination of attributable
     development expenses
 No ex post recognition of development expenses for an intangible
  asset
 Carry forward of a recognised intangible asset either at
          - cost (less amortisation) or
          - fair value (revaluation less subsequently accumulated
                        amortisation or impairment losses)
 Directly attributable costs for intangible assets generation relate to
  materials, services, employee benefits, legal registration fees,
  amortisation of patents / licenses
 No (indirect) admin. and overhead expenses, inefficiencies or start-up
  losses or training expenditures for staff operating the intangible asset
Challenge
 Sufficiently detailed and standardised cost center and/or project accounting
  established
  2008    Henkel AG & Co. KGaA   Global Tax Group (FCS)                          8
Agenda


1) Setting the scene – basic principles


2) Henkel's approach to R&D accounting


3) Industry examples


4) Conclusions




  2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)   9
2.1) Henkel Worldwide


 Sales 13,074 mill. euros    52,300 employees    125 countries




                                                                10
2.2) Three Areas of Competence




      Laundry &    Cosmetics/     Adhesives
      Home Care     Toiletries   Technologies




       Quality with Brands & Technologies

                                                11
2.3) Overview of our Top Brands




                         Cosmetics/
                          Toiletries




           Laundry/
          Home Care

                             Adhesives
                            Technologies




                                           12
2.4) Henkel's perspective on R&D


                                       Innovation

                                     IP Generation


                               • Corporate R&D
                               • Corporate Engineering
                               • BU Product Development
                               • BU Process Technology




 2008   Henkel AG & Co. KGaA    Global Tax Group (FCS)    13
2.5) Henkel's perspective on R&D


                                                   Goal
                               Sustainable value creation for
                    Henkel's customers and shareholders




  We strive for                     We are customer         We are committed to
    innovation                           driven                shareholder value



 2008   Henkel AG & Co. KGaA        Global Tax Group (FCS)                           14
2.6) Research & Development


Research & Development expenditures 2003 − 2007
Figures in mill. euros
       400
                                                          340    350
                                                   324
       300                 257         272

       200


       100


                          2003        2004         2005   2006   2007
R&D ratio*                 2.7         2.6         2.7    2.7     2.7 %
* research expenditures as a proportion of sales
                                                                          15
2.7) Research & Development 2007


Research & Development expenditures by business sectors

        10 %
                         27 %      350 mill. euros for Re-
                                    search and Development
                                    (R&D) correspond to 2.7
                                    percent of sales
                                   worldwide 2,800 employees
 46 %                    17 %       in R&D



           Laundry & Home Care      Adhesives Technologies
           Cosmetics/Toiletries     Corporate Research


                                                                16
2.8) Competence Center Chemistry
     CCC

 Polymer Chemistry and chemical synthesis
 Physical Chemistry




  2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)   17
2.9) Competence Center EMTech


 Biotechnology
 Microbiology




  2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)   18
2.10) Competence Center
      Scientific Computing – SC³


  Computer-aided                   Chemoinformatics      Applied Mathematics
Materials Simulations                                        & Statistics

                                                        1105001      150000     16555000000000545654
                                                        654654654565465465451038496345685
                                                        45654654654654611222887763 15684655555843
                                                        9464684684684848
                                                        465 465465465465654843213235551321891651
                                                        5646465465482
                                                        11233588
                                                        4455556684215648
                                                        1105001      150000     16555000000000545654
                                                        65465465456546546545103849634568
                                                        45654654654654611222887                76365
                                                        465465465465654843213232258222222222522121
                                                        564646546548211233588    4455556684215648465
                                                        112335885268439721123659762134
                                                        46546546546565484321323
                                                        5646465465482
                                                        112335884455556684215648
                                                        1105001      150000     16555000000000545654
                                                        65465465456546546545103849634568
                                                        45654654654654611222887 763
                                                        465 465465465465654843213235646465465482




 2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)                                             19
2.11) Competence Center Technology
      TECC

 Corporate Engineering
 Technology Development




 2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)   20
2.12) Challenges for R&D accounting
      at Henkel
    Highly variable R&D portfolio in / for different business units
    Diverse research and development project contents
    High interdependencies of project contents
    Broad portfolio of high volume, (rather) low cost products,
     partly short product life cycles (e.g. cosmetics, < 2 years)
 Degree of relevant R&D contribution to ultimate product success
     is often hard to determine quantitatively in a reliable way,
     especially at an early stage in the development process
                                     Unambiguous intangible asset identification?
                                       Transparent future economic benefit determination?
    Practical challenges …             Straightforward distinction of research vs. development phase?
                                       Reliable capture and transparent attributability of relevant cost?
                                       All recognition criteria in development phase cumulatively met?

     2008    Henkel AG & Co. KGaA   Global Tax Group (FCS)                                                   21
2.13) Decisions on R&D accounting
      policy (1/2)

 Tracking of R&D costs via projects in SAP (PS) or on cost centers
 Separate recognition of divisional and corporate R&D expenses and
  local product development expenses in Henkel's internal income
  statement
 Disclosure of R&D expenses in Henkel's consolidated statement of
  income ( Annual Report)
 No recognition of research expenses as - or pertaining to (intangible)
  assets
 IAS 38 criteria for recognising development expenses are currently
  not all being met




  2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)                     22
2.14) Decisions on R&D accounting
      policy (2/2)

 Self-generated software with definite useful live is stated at
  production costs
 Net book value of internally generated intangible assets with definite
  useful live was 100 M€ at 31.12.2007

  (i.e. 2.0% total intangible assets book value and 0.8% of total assets in 2007)




  2008     Henkel AG & Co. KGaA    Global Tax Group (FCS)                           23
2.15) Value based management
      implications

 Net income and after tax operating income are reduced by expensing
  R&D directly in current year, tax deductibility offsets this impact to
  some extent
 Reclassification of R&D expenses as capital expenditures impacts
  upon assets, equity, operating and net income, profitability measures
  (e.g. return on capital and equity), but no effect on (current) free cash
  flow to the firm
 The impact of R&D capitalisation on (expected) EBIT growth rates
  has a strong effect on business valuation and on earnings multiples
  commonly used for valuation purposes (e.g. PE ratio, Value/EBITDA)


         Suggested adjustments for (capitalisation of) R&D and marketing
         expenses upon assessment of value creation (cf. EVATM concept)

  2008      Henkel AG & Co. KGaA   Global Tax Group (FCS)                     24
2.16) Consequences regarding Henkel's
      application of EVATM
 Uncertainty regarding actual marketability of products, resulting
  from clearly identifiable development project contributions, is the main
  aspect to opt against capitalisation of development expenses
 Given the relatively stable amount of R&D spend, in line with
  Henkel's peer group companies, a (partial) reclassification of R&D
  expenses could potentially lead to higher accuracy regarding the
  application of the theoretical concept
 However, with respect to the magnitude of Henkel's R&D spend in
  relation to total assets, no fundamentally different presentation of
  company performance to potential and current investors expected
 On the down side, capitalisation of development expenses would
  require enhanced administrative effort, e.g. monitoring and evaluation
  of development project results on an ongoing basis
         No resulting "net benefit" for shareholders and stakeholders
  2008      Henkel AG & Co. KGaA   Global Tax Group (FCS)                    25
Agenda


1) Setting the scene – basic principles


2) Henkel's approach to R&D accounting


3) Industry examples


4) Conclusions




  2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)   26
3.1) R&D accounting in the automobile
     industry
Example: BMW – move from HGB to IAS in 2000




 2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)   27
3.2) Characteristic features of BMW's
     R&D
 Clear separation of research vs. development process
 "Engineering-type" development, allowing for stringent step-wise
  planning
 Reduced (limited) uncertainty, due to thorough experience from
  similar "predecessor series"
 Focused development contents / objects




  2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)               28
3.3) Equity and P+L impact for BMW
     (HGB  IAS, 31.12.2000)
                                               % of HGB
Equity                                M€
                                                equity

Recognition of development costs     2054        41.9




                                                % of HGB
                                                 result of
                                   Change in
                                                ordinary
                                      M€
                                                business
P+L                                               activity
Recognition of development costs     236          14.2




                                                          29
3.4) Impact on BMW's financial key
     figures and ratios (31.12.2000)
                                                           Change
                                 HGB             IAS         (M€,
                                                           % points)


Equity (M€)                      4.896           9.272      4.376


Equity ratio (%)                  13.7           18.9        5.2




   Sustainably higher equity

    Enhanced impact of investments and development costs
    on the evolution of BMWs (financial) results

                                                                    30
3.5) Other practical examples

 Bayer Health Care
  „Da eigene Entwicklungsprojekte häufig behördlichen Genehmigungsver-
  fahren und anderen Unwägbarkeiten unterliegen, sind die Bedingungen für
  eine Aktivierung der vor der Genehmigung entstandenen Kosten in der
  Regel nicht erfüllt.“ (Source: Bayer AG, Geschäftsbericht 2007, F&E Quote: 11.5% / 1700 M€)

 Beiersdorf
  Check of development projects for recognition as self-generated intangible
  assets according to IAS 38. If criteria are not met, expensing in current period.
  (Reference: Beiersdorf AG, Geschäftsbericht 2007, F&E Quote: 2.3% / 127 M€)

 Unilever
  "Expenditure on research and market support, such as advertising, is charged
  to the income statement when incurred."
  (Source: Unilever, Annual Report 2007, R&D ratio: 2.2% / 868 M€)

 Procter & Gamble
  "Research and development costs are charged to expense as incurred."
  (Source: P&G, Annual Report 2007, R&D ratio: 2.8% / 2112 M$)

                                                                                                31
Agenda


1) Setting the scene – basic principles


2) Henkel's approach to R&D accounting


3) Industry examples


4) Conclusions




  2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)   32
4.1) Status of and outlook on R&D
     accounting at Henkel

 For the time being, no change of R&D accounting policy intended
 No obvious immediate advantages discernable for Henkel's
  shareholders nor stakeholders, resulting from a potential
  (partial) reclassification of development expenses
 Administrative effort to track, identify and evaluate development
  expenses in line with IAS 38 should not be underestimated
 Harmonisation of international accounting standards and HGB
  regulations (eg. BilMoG) is advantageous, allowing for a true and
  fair representation of company performance to enable and facilitate
  investors' decisions in capital markets




  2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)                  33
4.2) Last not least …


 Thank you for your attention on a Friday afternoon!




  2008   Henkel AG & Co. KGaA   Global Tax Group (FCS)   34

								
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