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Regarding the treatment of R&D investment in the NIO financial report, NIO chooses to write off as expenses instead of capitalizing it to reduce the losses on the books. Is this small and reasonable operation enough to make the short-term financial report look good? Why doesn't NIO do it?
$NIO Inc (NIO.US)$ This is a very interesting issue involving the choice of corporate financial policies and accounting standards. NIO chooses to fully expense R&D costs rather than capitalize them, which indeed makes its financial statements appear to show huge losses. So, why choose this approach? Here are a few possible reasons and analysis:
1. Requirements of accounting standards and limitations on capitalization of R&D expenses
According to International Accounting Standards (IAS 38) and Chinese Accounting Standards, R&D expenses can only be capitalized under certain conditions. For example:
• The R&D project has entered the product development stage (rather than the research stage).
• The project is technically feasible and can bring clear economic benefits in the future (such as commercialization potential).
• The company has enough resources to complete the development and put it into use.
The situation of NIO:
NIO's R&D may be mainly focused on early-stage technology exploration, asia vets driving systems, battery swap optimization, and many projects have not clearly reached the commercialization stage. Therefore, these R&D expenses are more in line with the attribute of the "research stage" and need to be directly recognized as current expenses, rather than capitalized.
2. Conservative Financial Policies and Transparency
NIO may intend to adopt a more conservative financial policy to enhance financial transparency and show investors the actual scale of R&D investment.
• If R&D expenses are capitalized, they will be spread over the next few years, affecting profits through depreciation or amortization, which may "beautify" the financial data in the short term.
• However, excessive capitalization may raise concerns among investors about the risk of concealing losses by the company, especially for high-growth companies, such practices may damage market trust.
Nio hopes to convey to the market through direct expense recognition: the company is indeed increasing R&D investment, but these are strategic investments, not simple losses.
3. The short-term financial performance is of relatively low importance for Nio.
NIO is currently in a phase of rapid expansion and increased research and development investment, with investors focusing more on:
• technological innovation capabilities and future market potential.
• Sales growth and global expansion.
For enterprises in this stage, short-term profit is not the primary goal. Instead, continuous high R&D investment can enhance investor confidence. Therefore, NIO is more willing to directly include R&D expenses in the current period, demonstrating the company's strategic determination, rather than artificially inflating profits through capitalization.
4. Considerations of policies and markets
• Government subsidies and support: In the field of new energy vehicles in China, government support policies for technology R&D are often linked to R&D investment. If NIO chooses to expense, it may be easier to obtain subsidies or R&D tax incentives.
• Capital markets provide convenient financing: Although capitalization may appear to result in serious losses, investors are more concerned about core business indicators (such as delivery volume, market share). As long as the market recognizes its potential, financing ability will not be greatly affected.
Capitalization also carries risks.
Even though Nio capitalizes on research and development expenses, this is not without cost:
• If the R&D project fails, capitalized assets may need to be significantly impaired, directly impacting the company's balance sheet and future profits.
• At the same time, capitalizing practices may be considered a form of "performance embellishment", easily leading to market doubts about the financial authenticity.
Summary
NIO chooses to expense R&D costs instead of capitalizing them, mainly for the following reasons:
1. Many research and development projects are in the early stages and do not meet the strict conditions for capitalization.
2. Enhance financial transparency and market trust, avoid the suspicion of 'financial report embellishment'.
3. The current market has low profit pressure, placing more emphasis on technological innovation and long-term growth.
4. After incurring costs, there may be government policy support and tax incentives in the future.
The core of this strategy lies in sacrificing short-term profit performance in exchange for market and investor confidence in the company's long-term investment and technological accumulation.
How do you view NIO's choice? Do you think it should focus more on short-term profitability or stick to a technology-driven approach?
1. Requirements of accounting standards and limitations on capitalization of R&D expenses
According to International Accounting Standards (IAS 38) and Chinese Accounting Standards, R&D expenses can only be capitalized under certain conditions. For example:
• The R&D project has entered the product development stage (rather than the research stage).
• The project is technically feasible and can bring clear economic benefits in the future (such as commercialization potential).
• The company has enough resources to complete the development and put it into use.
The situation of NIO:
NIO's R&D may be mainly focused on early-stage technology exploration, asia vets driving systems, battery swap optimization, and many projects have not clearly reached the commercialization stage. Therefore, these R&D expenses are more in line with the attribute of the "research stage" and need to be directly recognized as current expenses, rather than capitalized.
2. Conservative Financial Policies and Transparency
NIO may intend to adopt a more conservative financial policy to enhance financial transparency and show investors the actual scale of R&D investment.
• If R&D expenses are capitalized, they will be spread over the next few years, affecting profits through depreciation or amortization, which may "beautify" the financial data in the short term.
• However, excessive capitalization may raise concerns among investors about the risk of concealing losses by the company, especially for high-growth companies, such practices may damage market trust.
Nio hopes to convey to the market through direct expense recognition: the company is indeed increasing R&D investment, but these are strategic investments, not simple losses.
3. The short-term financial performance is of relatively low importance for Nio.
NIO is currently in a phase of rapid expansion and increased research and development investment, with investors focusing more on:
• technological innovation capabilities and future market potential.
• Sales growth and global expansion.
For enterprises in this stage, short-term profit is not the primary goal. Instead, continuous high R&D investment can enhance investor confidence. Therefore, NIO is more willing to directly include R&D expenses in the current period, demonstrating the company's strategic determination, rather than artificially inflating profits through capitalization.
4. Considerations of policies and markets
• Government subsidies and support: In the field of new energy vehicles in China, government support policies for technology R&D are often linked to R&D investment. If NIO chooses to expense, it may be easier to obtain subsidies or R&D tax incentives.
• Capital markets provide convenient financing: Although capitalization may appear to result in serious losses, investors are more concerned about core business indicators (such as delivery volume, market share). As long as the market recognizes its potential, financing ability will not be greatly affected.
Capitalization also carries risks.
Even though Nio capitalizes on research and development expenses, this is not without cost:
• If the R&D project fails, capitalized assets may need to be significantly impaired, directly impacting the company's balance sheet and future profits.
• At the same time, capitalizing practices may be considered a form of "performance embellishment", easily leading to market doubts about the financial authenticity.
Summary
NIO chooses to expense R&D costs instead of capitalizing them, mainly for the following reasons:
1. Many research and development projects are in the early stages and do not meet the strict conditions for capitalization.
2. Enhance financial transparency and market trust, avoid the suspicion of 'financial report embellishment'.
3. The current market has low profit pressure, placing more emphasis on technological innovation and long-term growth.
4. After incurring costs, there may be government policy support and tax incentives in the future.
The core of this strategy lies in sacrificing short-term profit performance in exchange for market and investor confidence in the company's long-term investment and technological accumulation.
How do you view NIO's choice? Do you think it should focus more on short-term profitability or stick to a technology-driven approach?
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安安稳稳过日子 : William Li explained in one of his talks. It’s because they want to be transparent with their finances, so that they can attract global investors. He quoted that Abu Dhabi invested in NIO without much convincing. He only went there once and he wasn’t very good in his English as well and yet they invested in NIO.
Why? Because of their transparency.
沉思的张飞 OP : Agree！those criticised NIO for huge loss and did not make profit for many years … not the ideal investor for NIO now.