Research and Development Costs
Research and development costs are generally expensed as incurred under U.S. GAAP (ASC 730), with limited exceptions for software development and certain assets with alternative future uses.
Explanation
Research is planned investigation aimed at discovery of new knowledge. Development is the translation of research findings into a plan or design for new products or processes. Under U.S. GAAP, both are expensed as incurred because the future economic benefits are too uncertain to reliably measure.
Exceptions include: tangible assets with alternative future uses (capitalize and depreciate), costs of developing software for sale (capitalize after technological feasibility is established under ASC 985-20), and costs of developing internal-use software (capitalize during the application development stage under ASC 350-40). Materials, equipment, and facilities acquired for R&D with no alternative use are expensed.
Key Points
- •R&D costs generally expensed as incurred
- •Software for sale: capitalize after technological feasibility
- •Internal-use software: capitalize during application development stage
- •Assets with alternative future uses are capitalized and depreciated
Exam Tip
Know the exception for software costs — the capitalization trigger differs between software for sale (technological feasibility) and internal-use software (application development stage).
Frequently Asked Questions
Related Topics
Intangible Assets
Intangible assets are identifiable non-monetary assets without physical substance, such as patents, trademarks, copyrights, and customer lists, recognized at cost and amortized over their useful lives if finite.
Software Development Costs
Software development costs follow different capitalization rules depending on whether the software is developed for sale to others (ASC 985-20) or for internal use (ASC 350-40).
Income Statement
The income statement reports an entity's revenues, expenses, gains, and losses over a period of time, resulting in net income or net loss.
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