Following are the 2016 income

a) Accountingtreatment for R&D expendituresAccounting standards require companies to expense all research anddevelopment expenditures as incurred since the future benefits fromresearch and development are uncertain and R&D expenditurescannot be capitalized. However, in case of an M&A transaction,the R&D expenses of the target company may be capitalizedbecause the acquirer can recognize the fair value of the R&Dassets. The R&D costs are included in the company’s operatingexpenses and are usually reflected in its income statement.

There is an option to defer the R&D expenditure and carry itforward as an intangible asset if the following criteria aremet:

•   There is a clearly defined project•   Expenditure is separately identifiable•   The project is commercially viable•   The project is technically feasible•   Project income is expected to outweigh cost•   Resources are available to complete the project.

If these criteria are met, the entity may choose to eithercapitalize the costs, bringing them ‘on balance sheet’, or maintainthe policy to write the costs off to the profit and loss account.Note that if an accounting policy of capitalization is adopted itshould be applied consistently to all R&D projects that meetthat criteria.

The capitalized R&D costs should be amortized over theperiods expected to benefit from them. Amortization should beginonly once commercial production has started or when the developedproduct or service comes into use.

Considering the above accounting standard it is veryclear that Apple Inc. and Microsoft Corporation both the Companiesare accounting for R&D expenditures as operating expenses asincurred.

b) List ofthree specific costs that could be included in R&D expense onthe income statement.Research and development (R&D) expenses are associated directlywith the research and development of a company’s goods or servicesand any intellectual property generated in the process. A companygenerally incurs R&D expenses in the process of finding andcreating new products or services.I.   R&D expense related to develop the processorinside its own product instead of buying off from anothercompany.II.   R&D expense on upcoming products that mighttake years to hit the market.III.   R&D expense on self-driving cartechnologiesIV.   Third-party development and programming costs,localization costs incurred to translate software for internationalmarkets.

c)  Trend in theR&D expenses of each company over time

From the above table and graph it is very clear that the% of R&D expenditure on net sales for both the companiesremained same for the year 2014 and 2015 but there is an increasefor the year 2016.