Ross Neale is the divisional accountant for the Research and Development division of Critical…
Ross Neale is the divisional accountant for the Research and Development division of Critical Pharmaceuticals PLC. He is discussing the third-quarter results with Tina Snedden who is the manager of the division. The conversation focuses on the fact that whilst they have already fully committed the development capital expenditure budget for the year, the annual expense budget for research is well underspent because of the staff shortages which occurred in the last quarter. Tina mentions that she is under pressure to meet or exceed her expense budgets this year as the industry is renegotiating prescription costs this year and doesn’t want to be seen to be too profitable.
Ross suggests that there are several strategies they could employ, namely:
(a) Several of the subcontractors have us as their largest customer and so we could ask them to describe the services in the fourth quarter, which are essentially development cost, as research costs.
(b) We could ask them to charge us in advance for research work that will be required in the first quarter of next year without mentioning that it is an advance in documentation. That would be good for them as it would improve their cash flow and it would guarantee that they would get the work next year
(c) We could ask some of the subcontractors on development projects to charge us in the first quarter of next year and we could hold out to them that we would give them some better-priced projects next year to compensate them for the interest incurred as a result of the delayed payment.
Discuss the advantages and disadvantages of adopting these strategies.