This article explains the accounting treatment for research and development (R&D) costs under both UK and International Accounting Standards. Both UK and International Accounting Standards recognise the importance of accounting for R&D, but take a different viewpoint as to the method used Show WHY SPEND MONEY ON R&D?Many businesses in the commercial world spend vast amounts of money, on an annual basis, on the research and development of products and services. These entities do this with the intention of developing a product or service that will, in future periods, provide significant amounts of income for years to come. THE ACCOUNTING PREDICAMENTIf, in the future, economic benefit is expected to flow to the entity as a result of incurring R&D costs, then it can be argued that these costs should be treated as an asset rather than an expense, as they meet the definition of an asset prescribed by both the Statement of Principles and the IASB Framework for the Preparation and Presentation of Financial Statements. Equally, the argument exists that it may be impossible to predict whether or not a project will give rise to future income. As a result, both the UK and International Accounting Standards provide accountants with more information in order to clarify the situation. INTANGIBLE ASSETSIntangible assets are business assets that have no physical form. Unlike a tangible asset, such as a computer, you can’t see or touch an intangible asset. There are two types of intangible assets: those that are purchased and those that are internally generated. The accounting treatment of purchased intangibles is relatively straightforward in that the purchase price is capitalised in the same way as for a tangible asset. Accounting for internally-generated assets, however, requires more thought. R&D costs fall into the category of internally-generated intangible assets, and are therefore subject to specific recognition criteria under both the UK and international standards. R&D – DEFINITIONSResearch is original and planned investigation, undertaken with the prospect of gaining new scientific or technical knowledge and understanding. An example of research could be a company in the pharmaceuticals industry undertaking activities or tests aimed at obtaining new knowledge to develop a new vaccine. The company is researching the unknown, and therefore, at this early stage, no future economic benefit can be expected to flow to the entity. Development is the application of 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, before the start of commercial production or use. An example of development is a car manufacturer undertaking the design, construction, and testing of a pre-production model. UK TREATMENT OF R&DSo far we have established that expenditure on R&D can fall into the category of intangible assets. Under UK accounting standards, intangible assets are accounted for using the rules from FRS 10, Goodwill and Intangibles. Even though R&D can be an intangible asset in the UK, accounting for R&D is governed by its own accounting standard – SSAP 13, Accounting for Research and Development. Recognition Research Development
Treatment of capitalised development costs SSAP 13 requires that where development costs are recognised as an asset, they should be amortised over the periods expected to benefit from them. Amortisation should begin only once commercial production has started or when the developed product or service comes into use. Every capitalised project should be reviewed at the end of every accounting period to ensure that the recognition criteria are still met. Where the conditions no longer exist or are doubtful, the capitalised costs should be written off to the profit and loss account immediately. Problems with SSAP 13 SSAP 13 is not in line with the newer International Accounting Standard covering this area. As seen previously, the UK allows a choice over capitalisation; this can lead to inconsistencies between companies and, as some of the criteria are subjective, this ‘choice’ can be manipulated by companies wishing to capitalise development costs. INTERNATIONAL TREATMENT OF R&DOne notable difference between the UK and international treatment is that the UK has a separate standard for the treatment of R&D (SSAP 13), whereas under International Accounting Standards the accounting for R&D is dealt with under IAS 38, Intangible Assets. Recognition
Research phase Development
phase
Treatment
of capitalised development costs Each development project must be reviewed at the end of each accounting period to ensure that the recognition criteria are still met. If the criteria are no longer met, then the previously capitalised costs must be written off to the income statement immediately. EXAMPLE Bobbie Retallack is a lecturer at Kaplan Financial in Birmingham, UK When did research and development start?The concept of research is as old as science; the concept of the intimate relationship between research and subsequent development, however, was not generally recognized until the 1950s.
Who started research and development?Corporate R&D began in the United States with Thomas Edison and the Edison General Electric Company he founded in 1890 (which is today's GE). Edison is credited with 1,093 patents, but it's actually his invention of the corporate R&D lab that made all those other inventions possible.
What stage is research and development?Research and development (R&D) includes activities that companies undertake to innovate and introduce new products and services. It is often the first stage in the development process. The goal is typically to take new products and services to market and add to the company's bottom line.
What is the research and development process?Research and development, also known as R&D, is the process by which a company works to generate new knowledge that it might use to create new technology, products, services, or systems that it will either use or sell.
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