Existing estimates of research and development capital in the Canadian system

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32. Several types of intangible assets are already included in the CSNA estimates, including software development and mineral exploration. Some software R&D is encompassed in total investment in software, which was capitalized in the Canadian SNA in 2001.10 Mineral exploration has been capitalized in the accounts since 1997 as part of the revision to incorporate the SNA93 recommendations.

33. Software capitalization was introduced into the CSNA in 2001. Three types of software were included: prepackaged, custom-design and own-account. Own-account software was defined as that done "in-house" by employees for use within an organization. This includes work defined as R&D in the FM data and, if not taken into account, could lead to a potential double-count.

34. Not all purchases or costs related to software acquisition were included as investment when software capitalization was introduced into the CSNA. Expenditures on repair and maintenance, spending on employees' training on software, purchased software that would be embedded in hardware and then re-sold and the costs of developing software that would be later sold (not used in-house) were all excluded from software investment spending. The last exclusion (costs of developing software for later sale) is clearly R&D expenditure.

35. It is important to note that R&D on software and the actual software development create two distinct assets. Any mixing of these assets in the CSNA is the result of measurement issues. The R&D acts as an "intellectual machine" in the making of the software. Therefore, the R&D is capitalized by the producer of the software, while the software itself is capitalized by the purchaser of the software. For own-account R&D on software, the producer is also the purchaser.

36. To avoid a double count with software capital some of the software R&D as measured by the FM data, should be excluded from the R&D estimates, namely R&D on own-account software. However, data sources do not provide any distinction between whether the R&D work was done for in-house purposes and therefore already included in software capitalization or if it was being developed for resale and therefore to be included in R&D.11 In an effort to overcome this issue, all R&D expenditure undertaken by the software development and computer systems design industries North American Industrial Classification System (NAICS 5112 and 5415) were included in the R&D estimates. The assumption being that this expenditure was for R&D to support the development of software that was not in-house, but rather to be sold. All other software R&D spending (for all other industries) was considered to be for in-house purposes and therefore assumed to already be included in software capital.

37. In the case of mineral exploration, the costs associated with both successful and unsuccessful exploration are currently included as capital in the CSNA. The rationale for their inclusion as capital is that valuable knowledge regarding subsoil assets, and related to the eventual extraction, is gained from either process. These mineral exploration costs are not the same as the expenditure on R&D by mining companies as found in the FM data in Canada. The R&D expenditures from the FM data are aimed at improving the mining process, including exploration as well as other production.

38. Before the SNA 93, most spending on mineral exploration was already capitalized in the Canadian SNA. However, general exploration expenditures undertaken by a mining company on own account or by a mineral exploration company on contract, as well as geological and geophysical expenses incurred in the exploration of petroleum and natural gas were not capitalized. With the historical revision in 1997, all exploration expenditures as well as geological and geophysical expenditures were capitalized. As a result, spending on mineral exploration is not included in the estimates of R&D capital since these are intangible assets that are uniquely different than R&D. Conversely, R&D undertaken for the mining sector is not included in the exploration costs and therefore is included in the R&D expenditures.


10 . See Chris Jackson, "Capitalization of Software in the National Accounts", Statistics Canada, 2002

11 . The software capitalization estimates were not based on FM data but rather were calculated using labour force information related to programmers and engineers working on software development.