Research And Development Costs Flashcards
R&D activities
Research aimed to discover new knowledge
Searching for ways to apply new research findings
Formulation and design of possible products or process alternatives
Product testing or testing of process alternatives
Modification of the design of a product or process
Design, construction, and testing of preproduction product prototypes
Design of tools and molds involving new technology
The design and construction of a pilot plant not useful for commercial production
Engineering activity required to take a designed product to the manufacturing stage
What’s not considered R&D
As soon as a product hits the commercial production phase, nothing related to commercial production will be considered R&D
Quality control testing during commercial production would not be an R&D expense
Legal Fees for patent applications are not considered R&D.
IFRS R&D
Research costs are expensed but development costs are capitalized.
Software costs
A firm can capitalize the costs related to the development of computer software once the software has reached technological feasibility.
So once software is technological feasible costs during this stage are capitalized. Once the product is on the market and being sold, then the capitalized costs will start being amortized.
Rate for yearly amortization is the greater of
Ratio of software sales to expected total sales
Straight line method over economic life of the software
Can switch between the two options year to year depending on the sales for a given year and which would result in more amortization
Software that in internal-use only (won’t be sold commercially)
Amortized straight-line over its useful life
Cloud Computing Agreements deciding factor
If there is a software license transferred or not
If there is a transfer of a license
Then the accounting treatment is that the entire cost of agreement, including implementation costs, is capitalized and then amortized.
If there is no transfer of a license
Then it’s a service contract and the cost is expensed as incurred. Under a service contract, any implementation costs are capitalized to a prepaid account and amortized over the life of the service contract.
IFRS Difference
Under GAAP, software costs are expensed until technological feasibility is reached. Under IFRS, research costs for software are expensed, but all development costs are capitalized.
