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A harder ride for R&D

www.breakingviews.com

The introduction of International Financial Regulatory Standards (IFRS) in January is the big bang for accountancy. Public companies in the European Union will switch to new international rules that enable more precise cross-border comparison.

But the rules will affect different industries in different ways. In the case of drugs and technology companies, the expensing of share options issued to staff and the capitalization of development are likely to be the biggest changes. The problem is that while the new rules on options are welcome and bring clarity to a murky area, the rules on development could make a muddle of an area that is currently relatively clear.

Option expensing will certainly affect the financial statements of tech and pharma companies – both of which have been heavy users of options. If IFRS had been in force last year for example, German enterprise resource software company SAP's earnings would have been reduced by 11% and mobile phone maker Nokia's by 7%.

Drugs companies would have been less hard hit as they have issued fewer options than tech companies. But the average hit to their earnings would still have been of the order of 5%.

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