Accounting for Research and Development (R&D) Costs

Step 1: Definition of R&D Costs

Research Costs: Expenditures incurred to acquire new knowledge or understanding, primarily for the purpose of discovering new scientific or technological knowledge.

Development Costs: Expenditures incurred to apply research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services.

Step 2: Recognition of R&D Costs

Research Costs: Generally expensed as incurred since the future benefits are uncertain and not reliably measurable.

Development Costs: Capitalized if specific criteria are met, including technical feasibility, intention to complete, ability to use or sell, generation of future economic benefits, and adequate resources to complete.

Step 3: Capitalization Criteria

Technical Feasibility: The product or process must be technically feasible, meaning that it is feasible to complete it and use or sell the resulting asset.

Intention to Complete: The entity must demonstrate an intention to complete the project and use or sell the resulting asset.

Ability to Use or Sell: There must be a clear indication that the asset resulting from the development will be used internally or sold externally.

Generation of Future Economic Benefits: The project must have the potential to generate future economic benefits, such as increased revenues or cost savings.

Adequate Resources: The entity must have adequate resources, such as funding, personnel, and technology, to complete the project.

Step 4: Measurement of Capitalized Costs

Capitalized development costs are initially measured at cost, including directly attributable costs such as materials, labor, and overhead.

Subsequent measurement involves amortization or depreciation of capitalized costs over the asset's useful life, reflecting the consumption of economic benefits.

Step 5: Disclosure Requirements

Entities are required to disclose significant accounting policies related to the recognition and measurement of R&D costs, including the criteria used for capitalization and the amount capitalized during the reporting period.

Additional disclosures may include the nature and purpose of R&D activities, the allocation of costs between research and development, and the expected future benefits from capitalized R&D projects.

Fill in the Blanks Question: Under accounting standards, research costs are generally ____________ as incurred, while development costs may be ____________ if specific criteria are met. A) capitalized, expensed B) expensed, capitalized C) depreciated, capitalized D) amortized, expensed