Analysis of R&D Expense Data Differences and Accounting Treatment Issues at Yaomazi Company

Yaomazi Food Co., Ltd. is a well-known rattan pepper oil producer in China, whose main business is the R&D, production, and sales of seasoning oils such as rattan pepper oil and Sichuan pepper oil. According to public information, the company is preparing for an A-share listing [1].

The accounting treatment of R&D expenses is one of the main reasons for data differences. According to Chinese Accounting Standards, R&D activities are divided into the research phase and the development phase [2]:

• Research phase expenses
  : Should be fully expensed when incurred and recognized in current period profit and loss
• Development phase expenses
  : Can be capitalized when specific conditions are met and recognized in the cost of intangible assets

This distinction may lead enterprises to choose different treatment methods according to their own needs, resulting in differences in financial statement data.

Different disclosure standards may lead to data differences:

• Different calculation bases for the ratio of total R&D expenses to operating revenue
• Different collection scopes for R&D personnel compensation
• Differences in confirmation standards for direct material inputs

Enterprises may adjust prior-period data due to changes in accounting policies, leading to differences in data across periods:

• Adjustments to expensing/capitalization standards
• Changes in R&D project classification standards
• Changes in cost allocation methods

Some enterprises may adjust R&D expenses to manipulate profit performance:

• Capitalization of R&D expenses can reduce current period expenses and increase net profit
• Expensing treatment will reduce current period profit but increase future amortization

Points to note:

• Whether all details of R&D expenses are fully disclosed
• Whether there are cases where expenses should be included in R&D expenses but are instead recorded in other accounts
• Fairness of R&D expenses in related-party transactions

Whether the internal control system for R&D expense management is sound:

• Whether the processes for R&D project initiation, approval, and accounting are standardized
• Whether expense reimbursement and collection are properly reviewed
• Whether the issuance and destruction of R&D materials are effectively controlled

1. Vertical comparison
   : Focus on the changing trend of the company’s R&D expense ratio
2. Horizontal comparison
   : Conduct benchmarking analysis with comparable companies in the same industry
3. Detailed disclosure
   : Carefully read the R&D expense details in the prospectus
4. Accounting policies
   : Focus on whether the company’s adopted accounting policies and estimates are reasonable and consistent

Since Yaomazi Company has not yet been listed, relevant information disclosure is limited. It is recommended that investors focus on the following after the company officially discloses its prospectus:

• Specific composition and reasons for changes in R&D expenses
• Rationality of the R&D expense capitalization policy
• Correlation between R&D projects and main business
• Efficiency analysis of R&D input and output

[1] Securities Times - “Yaomazi IPO Progress” (https://www.stcn.com)

[2] Chinese Accounting Standard for Business Enterprises No.6 - Intangible Assets