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Research & development (R&D)
Research & development (R&D)
Research
Research
Research is the planned search aimed at the discovery of new knowledge that can be used to develop a new product or service that can be sold to customers.
Development
Development
Development is the translation of knowledge gained through research into a plan or design for a new product or service.
Reporting
Reporting
For financial reporting purposes, research and development costs are grouped together and reported either as a separate line in the income statement or in a note to the financial statements.
Research
Research
Development
Development
3 Cases where R&D is not expensed
3 Cases where R&D is not expensed
Software development costs
Software development costs
A key term for software development costs is technological feasibility, which is "the point in time when the [company] has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements."Â
R&D performed for the sale to other entities
R&D performed for the sale to other entities
If R&D is performed under contract for another entity, the costs are capitalized as inventory and placed on the balance sheet.
R&D purchased in a business acquisition
R&D purchased in a business acquisition
Sometimes companies acquire other companies in order to obtain technologies that have already been developed or are in the process of being developed.
If an acquired R&D project has achieved technological feasibility, it is considered "developed" and its fair value is capitalized as "finite-life intangible asset." Finite-life intangibles are expensed each period through amortization, which is essentially what we call depreciation for intangible assets.
If an acquired R&D project has NOT achieved technological feasibility, it is labeled in-process research and development and its fair value is capitalized as a "indefinite-life intangible asset." Indefinite-life intangibles are NOT amortized.
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