Introduction

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1. Expenditures on research and development (R&D) play a key role in most modern economies including Canada. Organizations use R&D as a way to advance knowledge, develop new products or improve current products and production processes. In this regard, R&D spending is similar to investment in capital assets (such as machinery and equipment) since the benefits of the work can accrue over a period of time. While R&D is an intangible asset, it also provides a store of value and should be reflected in measures of wealth.

2. However in the System of National Accounts 1993 (SNA93)–the international standard for the calculation of economic aggregates such as gross domestic product (GDP) and its underlying components and associated accounts–R&D spending has been treated as intermediate consumption rather than capital expenditure. Intermediate goods and services are used only once while capital assets are "used repeatedly or continuously in production processes for more than one year."¹ As a result, R&D's contribution to the economy is under-valued.

3. This issue had been previously identified by national accountants. SNA93 went as far as acknowledging that R&D spending was essentially investment activity. However, it was retained as intermediate consumption due to a number of perceived measurement difficulties including: distinguishing R&D activities from others in the production process; valuing R&D assets; and depreciating R&D capital to arrive at net stocks.²

4. Since then, a new set of recommendations have been put forward by the Canberra Group on the Measurement of Non-financial Assets. This group led the study of possible revisions to SNA93 on the measurement of tangible and intangible assets. In the forthcoming revised manual–SNA93 Rev1, R&D is recognized as an intangible capital asset with associated investment flows. This revised treatment was ratified by the United Nations Statistical Commission (UNSC) in 2007.

5. However, the adoption of R&D as an asset was accepted with the caveat that an implementation period was required to develop internationally comparable methods. This included consistent definitions of R&D as well as similar rates of depreciation and deflation methods.

6. A limited amount of research and development (R&D) activity is already capitalized in the Canadian System of National Accounts (CSNA). This study examines the impact of substantially broadening the capitalization of R&D in the CSNA and presenting the results in the form of a satellite account. The purpose of the Research and Development Satellite Account–aside from an impact study–is to act as a bridge towards the next historical revision of the CSNA. At that time, the CSNA will assess and implement SNA93 Rev1 and plans to expand the definition of capital to include all identifiable forms of R&D.

7. This study is an assessment of R&D data issues and options that are presented in a CSNA context, but also more generally. It also provides an initial set of estimates detailing the impacts of this change on the sequence of accounts.

8. This paper starts by examining the definition of research and development relative to the conceptual framework of the System of National Accounts (SNA). It then outlines the current treatment of R&D in the Canadian system. This is followed by an examination of the data sources behind the Research and Development Satellite Account (RDSA), followed by a description of the methodology used. The proposed methodology focuses on issues of valuation, depreciation and pricing of R&D capital. Measurement issues concerning inventories as well as inclusion in wealth estimates are also discussed. The role and structure of satellite accounts are summarized in the context of the sequence of accounts. A results section then follows. The paper concludes with a summary and suggestions for future work leading to the next historical revision to the CSNA.

 

¹ . Guide to the Income and Expenditure Accounts, catalogue 13-017, Statistics Canada (forthcoming).

² . See paragraph 6.163 in System of National Accounts 1993.