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Are Research and Development Costs Capitalized or Expensed?

Accounting for research and development costs will generally be expensed in the income statement unless there is alternative future use or if the company was hired to perform the research.

If there is an alternative future use, or the company was hired to perform the research, then those costs can be capitalized onto the balance sheet as a non-current asset and amortized over its useful life on a straight-line basis.

The whole point of capitalizing research and development costs is to match the expense incurred with the time period that the benefit is being enjoyed by the company. When we capitalize an expense, it removes the full burden of the expense from a particular period, and spreads the impact over the useful life. Universal CPA Review covers this in much more detail, but below is a high-level overview of the relevant concepts that you can expect to see on the CPA Exam.

Expensing Research and Development Costs

R&D costs should be expensed if there not future benefit. Even if there is a future benefit, R&D costs should be expensed if they are incurred prior to the application development stage is achieved.

Capitalizing Research and Development Costs

1) Alternative Future Use: Basically, this is just saying that a company would only incur research and development costs if they plan to create a product or service that will be able to generate value in the future. The product could be developed for internal use or it could be developed to sell to customers.

Assuming that there is alternative future use, not 100% of research and development costs can be capitalized. The rules vary depending on what stage the project is in.

2) Contractual agreement: If the company is engaged by a 3rd party to perform research and development (e.g. pharmaceutical company), then the costs to be perform that work can be capitalized.

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  • If a company is internally developing software to be sold, when can expenses be capitalized?

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