Research and development-financial reporting Alert Industries has spent $5 billion over the last three years in developing a new drug labeled BJ13. FDA approval is expected by the end of the month, at which time the drug will be available for sale

None of Alert's competitors has a product similar to BJ13, and the medical community is anxiously awaiting availability of this drug. Although BJ13 promises to be a "wonder drug" with huge financial success, Alert's income statements for the last few years have shown substantial losses and Alert's balance sheet does not include product BJ13 among the assets of the business.

Explain why one of Alert's seemingly most valuable assets apparently has been omitted from the balance sheet, and why Alert's income statements for the past few years reported substantial losses.
What will be an ideal response?

Generally accepted accounting principles currently require that amounts spent for research and development be expensed as incurred. This would result in $5 billion of expenses for R & D over the last three years, which contributed to and may have been responsible for the substantial losses reported by Alert. Because amounts spent on R & D must be expensed, these amounts are not capitalized or reported as assets. In the case of firms heavily involved in R & D activities, there are frequently no dollar amounts, or very insignificant amounts, in the balance sheet representing these companies' most valuable assets.