Accounting for Research and Development (R&D) Costs

Research and development (R&D) activities drive innovation and long-term value creation for many organizations, but they introduce unique challenges in financial reporting. Accounting standards set distinct rules for the recognition, measurement, and disclosure of R&D costs, with significant differences between US GAAP and IFRS, especially regarding internally developed intangible assets.

Definition and Classification of R&D Activities

• Research: Original and planned investigation undertaken to gain new scientific or technical knowledge and understanding.

• Development: Application of research findings to a plan or design for the production of new or substantially improved products, processes, or services before commercial production begins.

These activities may include laboratory research, prototype design, pilot plants, product testing, and the construction of preproduction models.

US GAAP: Expense as Incurred

Under US GAAP (ASC 730), all research and development costs must be expensed as incurred. There is no provision for the capitalization of internally generated R&D, with a few exceptions for software development (addressed separately under ASC 350-40 and ASC 985-20).

Journal Entry Example:

 Dr. Research and Development Expense

  Cr. Cash/Accounts Payable

This policy prioritizes immediate recognition of costs due to the uncertainty of future economic benefits from R&D efforts.

IFRS: Capitalization of Development Costs

IFRS (IAS 38) requires a distinction between research and development phases:

• Research phase: All costs are expensed as incurred.

• Development phase: Costs may be capitalized as an intangible asset only if specific criteria are met, including technical feasibility, intent and ability to complete, probable future economic benefits, availability of resources, and reliable measurement of costs.

Development costs are capitalized once all criteria are satisfied; otherwise, they remain expensed.

Software Development Costs

• US GAAP: Internal-use software development costs may be capitalized after the preliminary project stage; costs prior to this stage are expensed.

• IFRS: Follows IAS 38 principles for distinguishing research and development phases in software projects.

Disclosure Requirements

Both frameworks require companies to disclose:

• Total R&D costs expensed during the period

• Accounting policies for R&D and internally generated intangibles

• Capitalized development costs, if applicable (under IFRS)

• Description of projects if material to the financial statements

These disclosures help users assess the impact of R&D on current earnings and potential future value.

Amortization and Impairment (IFRS Only)

Capitalized development costs are amortized over their useful life, beginning when the asset is available for use. These assets are also subject to impairment testing if indicators of impairment arise.

Relevant Accounting Standards

• US GAAP: ASC 730 – Research and Development

• IFRS: IAS 38 – Intangible Assets

Summary Table: R&D Cost Accounting

Framework	Research Costs	Development Costs	Software (Internal Use)
US GAAP	Expense as incurred	Expense as incurred	Capitalize after feasibility
IFRS	Expense as incurred	Capitalize if criteria met	Capitalize if criteria met

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