Innovation Performance 13 02 2017

Why every CFO should care about innovation management

An accurate classification of R&D is a major challenge within Belgian companies, especially when they must identify the area of their development that must be capitalized in the accounting.

The dialogue between CFOs and Engineers is difficult.

“R&D? No, there is nothing in what I do that is related to R&D. My work here is pretty standard.”

That is the common answer of an engineer in response to his CFO’s attempts to improve its R&D management and incentives.

On the one hand, the CFO does not have the scientific competencies to understand, to challenge or even to debate the nature of the engineering activities. On the other hand, the engineer is convinced that his activities are routine and has a limited vision of legislative and fiscal R&D definitions. This inability to find common ground is a major obstacle for innovation management optimization within a company.

The R&D is present in all sectors. Support to R&D and process optimization is often left out.

It must be mentioned that R&D is classified into 3 types:

Fundamental research,

Industrial research,

Experimental development.

The first type is the most generally recognized. The two others are less well-known. In order to demystify them, Belgian authorities have changed the term “applied research” to “industrial research” in 2013.

These definitions allowed R&D to be identified in all sectors, even in those with proposed services like banking, finance or insurance.
These activities are mentioned in the Frascati Manual (OECD Proposed Standard Practice for Surveys on Research and Experimental Development). One should also keep in mind that an employee could partially engage in research, as parts of his activities may be dedicated to an eligible R&D project.

Just take a look at the definitions of industrial research and experimental development to realize that the identification of the scope of R&D is not an easy task. Often, companies do not consider the support to R&D as an eligible activity: in addition to R&D in the strict sense, R&D management and information activities in support and directly related to an R&D project (including budgetary management, HR management, etc…) should be included in the scope. Process optimization is also often left out.   

 

The classification of the R&D is important, especially for capitalization.

An accurate classification of R&D is a major challenge within Belgian companies, especially when they must identify the area of their development that must be capitalized in the accounting. Some of them avoid using R&D incentives because there is no development capitalization in their balance sheet, while some incentives are not related to the necessity of immobilizing the involved costs. 

Readers will have gathered that R&D identification and classification has an impact on performance. An optimized innovation management is crucial if one aims to reach high and sustainable efficiency. 

Performance and Innovation management: strongly correlated!

All in all, Europe’s ambitious R&D financing objective and the transition challenges imposed by our society will push companies to invest more in innovation. As a result, the need to optimize their performance will lead firms to accurately identify and classify their R&D.