Chapter 33: Research and Development Cost

ACCOUNTING FOR DEVELOPMENT COST

 Development cost may or may not be
RESEARCH
recognized as an intangible asset
- Original and planned investigation
depending on very strict criteria
undertaken with the prospect of gaining
scientific or technical knowledge and
Criteria for recognition (should be all):
understanding
a. The *technical feasibility of
completing the intangible asset so
EXAMPLES OF RESEARCH ACTIVITIES:
that it will be available for use or sale
 Laboratory research aimed at *achieved when a prototype or model
obtaining or discovering new is produced
knowledge b. The intention to complete the
 Searching for application of research intangible asset and use or sell it
finding and other knowledge c. The ability to use or sell the
 Conceptual formulation and design of intangible asset
possible product or process d. How the intangible asset will
alternative generate probable future economic
 Testing in search for product or benefits
process alternative e. Availability of resources or funding
to complete development and to use
ACCOUNTING FOR RESEARCH COST or sell the asset
 Recognized as expense when incurred f. The ability to measure reliably the
 No research costs is capitalized since expenditure attributable to the
future economic benefits cannot be intangible asset during the
certain development

DEVELOPMENT COST AICPA FINANCIAL ACCOUNTING STANDARDS

- Involve the application of research BOARD
findings to develop a new product  According to FASB, expenditures* for
research and development which have
EXAMPLES OF DEVELOPMENT ACTIVITIES alternative future use, either in
 Design, construction, and testing of additional research project or for
preproduction prototype and model productive purposes, can be capitalized
 Design of tools, jigs, molds, and dies
involving new technology* *these expenditures include:
*is the first design, not the routine design  Cost of materials used
 Design, construction, and operation of a  Depreciation of equipment used in
pilot plant that is not of a scale R&D
economically feasible to the entity for  Amortization of intangible asset
commercial production* used in R & D
*means before commercial production
 Design, construction, and testing of a
chosen alternative for new or improved
product or process
ACTIVITIES NOT CONSIDERED RESEARCH AND formulation
DEVELOPMENT Outside consulting fees 
- Activities that relate to commercial Indirect costs allocated 
production do not result to research R&D Not
Cost
and development cost Expense R&D
Additional cost for
EXAMPLES OF ACTIVITIES NOT CONSIDERED revising the process to
R&D ensure that the product 
could be introduced in
o Engineering follow through in an early
the market
phase of commercial production
Outsourced R&D 
o Quality control during commercial
Completion of detailed
production including routine testing 
program design
o Trouble shooting and breakdown Cost incurred for coding
during production and testing to establish 
o Routine on-going effort to refine, technological feasibility
enrich, or improve quality of existing Costs when economic
product viability is not yet 
o Adaptation of an existing capability to a achieved
particular requirement or customer Cost of conference for

need the introduction of new
o Periodic design changes to existing product
R&D work for another
products
entity or for the 
o Routine design of tools, jigs, molds, and
government
dies Start-up costs 
o Activity, including design and Marketing research 
construction engineering related to Training cost 
construction, relocation, rearrangement
or start-up of facilities, and equipment INTERNALLY DEVELOPED COMPUTER
SOFTWARE
In a Nutshell:
 Before technological feasibility
Development
(Research Stage): R&D Expense
Costs
 After technological feasibility :
Intangible Asset
Technological Commercial  cost of coding and testing
Feasibility Production  cost to produce the product
masters
 Actual production:
R&D Not Inventory
Cost
Expense R&D  Cost to actually produce the
Salaries  software from masters
Cost of developing and
  Cost to package the software
producing test model
for sale
Modification of process 
AMORTIZATION & IMPAIRMENT ON COMPUTER
SOFTWARE
 The amortization method for a
computer software shall reflect the
pattern in which the future economic
benefits are expected to be consumed
by the entity
 If such pattern cannot be determined
reliably, the straight line method is used
 Computer software is tested for
impairment whenever there is an
indication of impairment at the end of
the reporting period

CLASSIFICATION OF COMPUTER SOFTWARE

 General rule : Intangible Asset
 Purchased for resale : Inventory
 Purchased as an integral part of
hardware: PPE
 Not an integral part : Intangible Asset
(silent)

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Notes:
 If an entity cannot distinguish the
research phase from the development
phase, the entity treats the expenditure
as if it were incurred in the research
phase only (expensed)
 “This costs will be recouped after 2
years but the process has not achieved
economic viability” : R&D Expense