Table of Contents

Abstract 1

The nature and value of research done by BSF Ltd to society 1

Problem encountered in early research of BSF Ltd 2

Nature and difference of research and development and accounting treatment 4

Nature and difference of research and development 4

Identification of costs and accounting treatment of R&D activities 6

The fair market value patent 7

The journal entries for the R&D transactions from 2013 to 2016 8

The journal entries for CSIRO grant and explanations 10

The BSF Ltd. Management assertion in prospectus 12

Reference: 15


The Bio-sustainable Feeds (BSF) Ltd is Australian based company dealing with Bio-research. The company has been operational for more than two decades. The company has contributed greatly through scientific research and development of a wide range feeds e.g. poultry, pigs, and fish. The company researched and developed plant-based feed, but the reception was not satisfactory since it raised some criticisms on environmental and health, majorly on fish feed.

The company embarked on another journey of developing alternative aquaculture feed to substitute the plant-based feed. The company has already spent $160million AUD from company kitty and additional $340million AUD from Commonwealth Scientific and Industrial Research Organisation (CSIRO) out of the previously awarded grant of $500million AUD. The research has taken three years and development is estimated to take another two years.

The report looks into the nature of the bacteria-based feed technology and the challenge encountered from the previous innovation of plant-based feed. The project is estimated to cost $540million AUD for its completion. Also, provides an in-depth understanding on how to account for research and development cost and grants to promote consistency and uniformity during comparable analysis by users of financial information.

The nature and value of research done by BSF Ltd to society

The BSF Ltd invested in the formulation of bacteria-based feed technology to overcome the issues raised by environmental based organisation and consumers. The approach takes the path of maintaining sustainability which is a global concern for both public and private firms. The BSF Ltd concentrated on producing bacteria-based feed. Other alternative feeds includes planktons and insects (Barrows & Sealey, n.d).

The bacteria-based technology utilises methane gas obtained from rotting matter i.e. biogas or as natural gas. The process requires bacteria which converts methane into protein. The bacteria are cultured in a tank containing water medium, methane gas, ammonia and some minerals. The bacteria developed is then dried, crushed into dust and converted into pellets, ready for use by the farmer. The bacteria used are referred to Methylococcus capsulatus which uses methane gas a source of energy. The approach can also use yeast bacteria to develop the feed since it usually uses biomass obtained from farm or forest, and thus readily available (Barrows & Sealey, n.d). Therefore, the completion of the research and development process of the product is seen as a breakthrough in eliminating shortcomings from the use of plant-based feeds.

Problem encountered in early research of BSF Ltd

The BSF Ltd previously engaged in developing aquaculture feed based on plants such as canola, sunflower, soya beans, etc. The associated research cost in the formulation of the plant-based feed was estimated to be $360million in which $120million was directly associated high-value piscavorian fish. The fish feed was majorly meant for fish-eating species for example salmon, tuna, trout, etc. The specific reason of the formulation of plant-based feed was to resolve the issue of conversion at a rate of 10kg of low-value fish into 1kg of high-value fish. The feed constituted 30kg of wet feed based on plant and at least one third or 10kg of dead fish (Barrows & Sealey, n.d). The major challenge of the feed was that the growth rate nearly doubled, and adult fish were smaller in comparison with other fish.

Consequently, the approach received various public criticisms on the environmental concern. The fish ingredient had since reduced from one period to another for example in 2003 the fish component was quantified as 24% of the fish meal. It later reduced to 16% in 2008, and it is expected to reduce to 7% in 2020 (CBC, 2016). Though, environmentalist, and scientist views it to be sustainable, high use of plant-based has a significant impact on the environment. The critic put forth that the current use of the useful plant in feed formulation might look negligible but with time, the ingredients will be required in large quantities thus translating to larger environmental footprint (Rust et al. , 2016). The technologies have a great impact on food security in future since high-quality human food is diverted to feed luxury fish. The accusation goes further into elaborating that the plant-based feed poses a significant danger to the poor in the society by increasing the risk of malnutrition or starvation but benefiting the rich who grows fish for prestige (Lothe, 2013).

The Omega-3 is one of the essential fatty acids in fish, and it is essential in human health. Also, the Omega-3 makes the fish attractive and tasty to consumers. Therefore, feeding them with high qualities of plant materials will reduce the amount of Omega-3. The reduction of the Omega-3 has huge consequences in the nutritional value of the fish, and thus posing great health danger and market demand of the fish (Rust et al. , 2016).

However, the current level of use of plant-based is as low as 4%. The trend is estimated to rise in future due to dynamics and the growth in demand for agricultural products. The Fry noted that the aquaculture is the fastest growing sector of animal production interviewed by CBC news (CBC, 2016). Therefore, BSG had to address the problem by developing an alternative aquaculture feed to reduce environmental footprint caused as a result of the use of extensive plant-based feed.

Nature and difference of research and development and accounting treatment

Nature and difference of research and development

The research and development are treated as a single process by several individuals, but the two words have different meanings. Therefore, breaking them down into two and explaining them differently is essential in reducing confusions. According to AAS 13 (4) (a), research means a planned investigation done with the aim of gaining new scientific or technical knowledge and comprehension. The research is useful in the development of a new product or service, or introducing a new process or bringing about a great improvement on existing product or process (ASB, 1983).

On the other hand, development means conversion of finding in the research process or other knowledge into a plan or design for developing a new product or process or huge improvement to an existing product, service or process. Therefore, it is clear that the research process gives way to development process once the research gets approved as workable. The AAS 13 classifies activities that qualify to be recognised as research and development (R&D) in section five to ten (ASB, 1983).

The identification of research and development activities is important for accounting purposes since it ensures that reporting consistent and relatively uniform, and thus making comparative industry analysis of financial statement easy and accurate. The investors and other users of financial information use financial statements in analysing viability of the business venture before making their decisions for investing or advancing loans or any other obligation (ASB, 1983). Therefore, lack of consistency and uniformity in treating research and development cost can bring huge differences that impact on the decision made using analysis of financial statements.

The standard brings forth the challenge of identifying specific activities to be identified as research and development related activities since it is a continuous process that keeps on evolving every day, but the nature that encompasses R&D is well understood. There has been a significant challenge in differentiating between development and production activities since they are both concerned with an almost similar line of events (ASB, 1983). The AAS 13 statement provides various definitions that reduce confusion in distinguishing R&D activities from other relatively similar activities. The definition as per section 7 elaborated below;

  • The discovery of new knowledge is the principal aim of the activity.

  • Finding for the submission of new research finding or other knowledge

  • The activity demonstrates formulation and design of improved or new product or process

  • The activity entails testing in search of a new product or process.

  • The evaluation of new product or process as per the research

  • The activities related to design, construction, and testing of prototypes and models (not produced for commercial but testing),

  • The operation of the pilot plant aimed at experimenting before expanding to a scale that is economically feasible for commercial production.

The above definition of research and development activities minimises the confusion in differentiating it from other related activities. The statement goes further into elaborating activities that bear above definitions but are excluded from R&D activities (ASB, 1983). These activities include;

  • The continuous engineering practices done during early stages of commercial production;

  • The quality control procedures in industrial production for example continuous product testing;

  • The improvement of product qualities classified as a routine or ongoing effort of refining the product or service.

  • The troubleshooting activities during commercial activities due to mechanical breakdown;

  • And other seasonal or periodic design changes for the existing product that does not require demonstration of new scientific procedure or knowledge.

There is always great confusion in determining whether routine or promotional market research qualifies to be treated as R&D. The statement makes it clear that it is not treated as R&D unless the product aims at establishing the existence and extent of a potential market before the commencement of commercial production (ASB, 1983).

Identification of costs and accounting treatment of R&D activities

The understanding of recognising an activity as R&D or not is important stage in accounting for it. The understanding of elements of the cost is another important stage in achieving a reasonable degree of comparability of among firms in the same industry. The statement brings forth that all the cost incurred during R&D process is accounted as its cost (ASB, 1983). The cost includes material consumed, services, salaries and wages, and other related cost to personnel who participated in the R&D activities. Consequently, the statement takes into consideration the service charge associated with assets used in the R&D which includes depreciation, and amortisation of patent and license. However, the activities must strictly relate to the research and development activity undertaken by the company.

The R&D cost is recognised as expenses in the profit or loss account. The expenses are charged during the period that it was incurred. However, it can be deferred depending on the future probable period of the R&D benefit (ASB, 1983). The deferral of the cost must meet condition or test that the cost depends on a large extent of the activities that takes place in future.

The fair market value patent

The fair market value represents the amount of money a buyer is willing to part with to purchase the patent. The fair market value is arrived at by using the market approach where the values are determined using previous patent (Brewer, Garrison, and Noreen, 2008). Therefore, the patent is benchmarked from the value of a fairly similar product to get a rough estimate. Also, the calculation will factor in discounting rate to get the present value of the patent. The calculation below shows how the fair market value is arrived at;


FV is the expected market value in two years i.e. $700million AUD,

P is periodic payment received from developed fish feed i.e. $200million AUD each year,

n is the number of years,

r is discounting rate.

Therefore, the fair market value of the patent is as shown in the calculation below;


=600.137 + 1342.016

= $1,942.153million AUD

The use of market approach has merits which include a fairly accurate price since they are compared with previously sold patents. Also, the market approach uses various methods such as comparable transactions, premium price-earnings-multiple, and comparable companies (Brewer, Garrison, and Noreen, 2008). Though the method faces numerous challenges such as uniqueness of patents thus hard to get a similar patent and it is difficult to allocate between the business and patent. Therefore, various assumptions have been taken into consideration in arriving at a fair market value. The assumptions are as follows;

  • The discount rate used is adjusted to take care of factors affecting the value of money i.e. inflation.

  • The patent was fairly similar to a previously sold patent by its competitor.

  • The data given is accurate thus giving a correct prediction of the present value of cash flows and market value.

  • There will be no competitor producing another product that might substitute the alternative aquaculture feed generated by BSF LTD in the next 10years.

  • The feed does not have any side effect thus it will not face injunctions or any other environmental cost that will reduce cash inflows throughout the period of 10years.

The journal entries for the R&D transactions from 2013 to 2016

As discussed earlier, research and development cost is recognized as expenses and therefore, debited in the profit or loss account. Also, the research and development cost is charged in the period it is incurred, deferred or amortized (Brewer, Garrison, and Noreen, 2008). In our case, the cumulative research cost for the three-year period, and development cost for two years is given. Therefore, the amount given will be redistributed to yearly expenditure by dividing the entire cost by three and two years respectively. The annual cost is arrived as shown below;

The BSF Ltd has spent $500million AUD for three years and $200million AUD for the two years of development. Therefore, yearly expenditure is;

Yearly expenditure for research (2013-2014) =  ACCOUNTING THEORY & CURRENT ISSUES 4 = $166,666,667AUD

Yearly expenditure for development (2015-2016) =  ACCOUNTING THEORY & CURRENT ISSUES 5 = $100,000,000AUD

Thus journal entries for four years are as shown below;

Year: 2013

Dr. Profit or loss a/c $166,666,667

Cr. Research and development a/c $166,666,667

Year: 2014

Dr. Profit or loss a/c $166,666,667

Cr. Research and development a/c $166,666,667

Year: 2015

Dr. Profit or loss a/c $100,000,000

Cr. Research and development a/c $100,000,000

Year: 2016

Dr. Profit or loss a/c $100,000,000

Cr. Research and development a/c $100,000,000

The journal entries for CSIRO grant and explanations

The CSIRO grant is treated under AASB 120 which stipulates how government grants are accounted and disclosed. AASB 120 defines government grant has assistance by the government by transfer of resources to a firm in return for the past or future fulfilment of a certain condition relating to its operations (AASB, 2012). In our case, the grant is provided since the BSF Ltd is conducting research and development in the quest to create alternative aquaculture feed. The government has an interest in the R&D of BSF Ltd since the feed formulation will improve environmental sustainability. According to AASB 120, the government grant is recognized as income, and thus recorded in the profit or loss account (AASB, 2012). The Commonwealth Scientific and Industrial Research Organisation grant are given as lump sum thus accounting for it becomes a little tricky since the accounting accrual assumption is not used in its recognition as income in profit or loss account. The AASB 120(16) stipulates that the grant recognition in profit or loss account should be done on a systematic basis (AASB, 2012). For instance, it is recognised on a systematic basis i.e. firm recognises grant as it incurs expenses in the project. Therefore, the basis of recognising accrued income contravenes AASB 101 on presentation of financial statement. Though, the accrual accounting assumption can be used in cases where there is no basis for allocating grant throughout the period.

The posting of journal entries for BSF Ltd must be per the above guidelines. Therefore, entries are as shown below;

The grant is received in a lump sum and spent for five years, and thus important to apportion the grant for the five-year period.

Yearly grant apportionment (2013-2014) =  ACCOUNTING THEORY & CURRENT ISSUES 6 = $113,333,333 AUD

Yearly grant apportionment (2015-2016) =  ACCOUNTING THEORY & CURRENT ISSUES 7 =80,000,000

Note: We assume that BSF Ltd will send an equal amount of grant for the years apportioned. Also, the basis of allocation is not stipulated thus accrual accounting assumption will be used in posting grant to journal entries.

Year: 2013

Dr. Grant 500,000,000

Cr. Grant Accrued 386,666,667

Cr. Profit or loss A/C 113,333,333

(Note: Grant accrued = 500,000,000-113,333,333 = 386,666,667)

Year: 2014

Dr. Grant accrued 113,333,333

Cr. Profit or Loss 113,333,333

Year: 2015

Dr. Grant accrued 80,000,000

Cr. Profit or Loss 80,000,000

Year: 2016

Dr. Grant accrued 80,000,000

Cr. Profit or Loss 80,000,000

The grant will be recognised as an income once the expenses are incurred. Therefore, the amount remaining from the grant is recorded has grant accrued income. The accrued income is recorded as an expense in the profit or loss account (AASB, 2012). The patent is recorded as an asset on the balance sheet and recognised at fair market value.

The BSF Ltd. Management assertion in prospectus

The assertion is not reasonable, and it is meant to confuse investors in making their investment decisions. The assertion is false since the bacteria-based production was patented (US 6,855,526, B2) on 15th February 2015 by Agricultural Research Service (ARS). The method was termed as “biobased” since it is based on feeding high-fructose corn syrup to the bacteria species Lactobacillus in a deep-tank for fermentation (, 2005). Therefore, BSF Ltd does not have any patent predicated for the bacteria-based feeds technology, and it remains the sole property of ARS. The ARS reserves the right to sell to the third party who can either adopt it the way it is or make some improvements.

Consequently, the technology has been adopted by several companies who are pursing the same investment path as BSF Ltd. The companies dealing with bacteria-based feeds include Calysta, San Francisco-based Company, and Unibio, Denmark-based Company (Wattagnet, 2016). The Calysta has received great support from investors such as Monsanto who have invested billions of dollars for research in less than 10years due to prospects of getting a market share of $8billion. On the other hand, Unibo turned its water treatment plant for production of bacterial protein. The protein products produced will be branded as Uniprotein and sold as the animal feed supplement (Wattagnet, 2016). The major market being salmonella fish farmers who are aiming to increase protein content in fish produces. Unibio Company purports that it has been developing the technology for a long period and claims to be the first commercial-size production facility (Wattagnet, 2016). Therefore, ruling out the possibility of BSF Ltd patenting the technology.

Lastly, the technology has received great resistance since the bacteria-based feed is associated with negative environmental and health issues. The process of manufacturing the protein is questionable since methane from cabbage and carbon products is channeled to water containing bacteria for it to mature faster. The danger comes in from the fact that Microbiologist is not limited to strains of bacteria that are naturally available but biochemical pathways allow them to write DNA and thus posing a great risk (The Guardian, 2016). The practice brings ethical concerns from various parties since microbiologist can genetically produce the bacteria, and thus the high possibility of producing harmful bacteria which will then be transmitted to human being through consumption of fish products (The Guardian, 2016). Consequently, the bacteria-based feeds are not allowed in some parts of the world such as North America. Though, Europe countries have allowed the use of technology in manufacturing protein feeds, investing in the field is tricky since it can be faced out of the market through regulations i.e. when environmental impact is greater than benefit.

In conclusion, it is clear that the bacteria-based feed technology is not the intellectual property of BSF Ltd since ARS patented it in 2005 (, 2005). Also, the technology faces resistance in accessing market due to most likely side effects. Therefore, investing in the venture is very risk, and thus prior sustainable analysis of its environmental impact is necessary.


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