Research and

Development Costs
 PAS 38, paragraph 52 provides that to assess
whether an internally generated intangible
asset meets the criteria for recognition, an
entity classifies the generation of the asset
into a research phase and a development
phase.
 Paragraph 53, If the entity cannot distinguish
the phases, the expenditure is treated as if it
were incurred in the research phase only.

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Research
It is the original and planned investigation
undertaken with the prospect of gaining scientific or
technical knowledge and understanding.

Undertaken to discover new knowledge that will be

useful in developing the new product or may result
to a significant improvement of the existing product.

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Examples of Research Activities
1. Laboratory research aimed in obtaining new
knowledge
2. Searching for application of research finding
3. Conceptual formulation and design of possible
product or process alternative
4. Testing in search for product or process alternative

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Development Cost
Development is the application of research findings
or other knowledge to a plan or design for the
production of new or substantially improved
material, devise, product, process, system or service
prior to the commencement of commercial
production.

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Examples of Development Cost
1. Design, construction and testing of preproduction
prototype and model.
2. Design of tools, jigs, molds and dies involving new
technology.
3. Design, construction and operation of a pilot plant
that is not of a scale economically feasible to the
entity for commercial production.
4. Design, construction and testing of a chosen
alternative for new or improved product or process.

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Activities not R&D
Activities that related to commercial production do
not result to R&D Costs

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Examples not R&D
1. Engineering follow through in an early phase of commercial
production.
2. Quality control during commercial production including
routine testing
3. Trouble shooting breakdown during production.
4. Routine on-going effort to refine, enrich or improve quality
of an existing product.
5. Adaptation of an existing capability to a particular
requirement or customer need.
6. Periodic design changes to existing products.
7. Routine design of tools, jigs, molds and dies.
8. Activitiy, including design and construction engineering
related to construction, relocation, rearrangement or start-
up of facilities and equipment
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Accounting for
R&D Costs

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Research Cost
 PAS 38, paragraph 54 states that
expenditure on research or on the research
phase shall be recognized as expense when
incurred.
 This is due to the uncertainty of the
success of the project. Generation of future
economic benefits cannot be assured.

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Development Cost
 The cost may qualify as intangible asset if and
only if it demonstrates all of the following
criteria:
1. Technical feasibility of completing the
intangible asset (completion of a prototype)
2. Intention to complete and use or sell it.
3. Ability to use or sell the asset
4. Existence of a market for probable future
economic benefits
5. Availability of resources or funding to
complete the development cost
6. Ability to measure reliably the expenditure
attributable to the intangible asset during
its development.
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Acquired in-
process R&D
Project

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Acquired in-process R&D
 An in-process r& d project acquired
separately or in a business combination is
recognized as an asst at cost, even if a
component is research.
 Subsequent expenditures may be expensed
or capitalized depending on the criteria it
qualifies.

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American Standard

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AICPA FASB
 Stipulated that expenditures for r & d which
have alternative future use, either in
additional research project or for productive
purposes, can be capitalized.
 Costs incurred for materials, equipment and
intangible asset related to research and
development which have alternative future
use can be capitalized.
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AICPA FASB
 Subsequently, the following should be
charged to r and d expense
 Cost of materials used
 Depreciation of equipment used in r&d
 Amortization of intangible assset used in
r&d

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Internally Developed Computer Software

Cost incurred in creating computer software product

shall be charged as expense when incurred until a
technical feasibility has been established for the
product.

Technical feasibility has been established when an

entity has produced either a detailed program design
of the software or a working model.

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Internally Developed Computer Software

After technological feasibility has been established,

capitalizable software costs include
• the cost of coding and testing
•and the cost to produce the product masters.

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Thank you!
Any questions?

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