Intangible Asset - Research & Development

Research & Development

IAS 38 requires any project that results in the generation of a resource to the entity be classified into two phases: a research phase, and a development phase.

Research is defined as "the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. "

Development is defined as "the application of research findings 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. "

The accounting treatment of such expenses will depend on whether it is classified as research or development. Where the distinction cannot be made, IAS 38 requires that the entire project be treated as research and expensed through the Statement of Comprehensive Income.

As research expenditure is highly speculative, there is no certainty that future economic benefits will flow to the entity. As such, prudence dictates that research expenditure be expensed through the Statement of Comprehensive Income. Development expenditure, however, is less speculative and it becomes possible to predict the future economic benefits that will flow to the entity. The matching concept dictates that development expenditure be capitalised as the expenditure will generate future economic benefit to the entity.

The classification of research and development expenditure can be highly subjective, and it is important to note that organisations may have an ulterior motive in its classification of research and development expenditure. Less scrupulous directors may manipulate financial statements through their classification of research and development expenditure.