Question

RESEARCH AND DEVELOPMENT

1. IFRS requires that firms must expense all Research and Development costs as incurred.

If Yes: Explain your answer

If No: Explain your answer

2. What is the reasoning used by the IASB for the treatment of research and development costs? Do you agree? Explain

Answer 1

International Financial Reporting Standards (IFRS) prescribes the treatment of R&D costs in IAS 38 as a part of internally generated intangible assets.

IAS 38 defines research as: ”original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge ” and development as: “the application of research findings or other knowledge 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.”

In simple words,in development stage,the planning done and knowledge obtained in research stage is applied.

IAS prescribes treatment of Research cost as an expense only and that of development expenditure either as an expense,it the prescribed criterion are not met, or as an intangible asset if all of the prescribed criterion are met.

An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following:

• The technical feasibility of completing the intangible asset so that it will be available for use or sale.
• Its intention to complete the intangible asset and use or sell it.
• Its ability to use or sell the intangible asset.
• How the intangible asset will generate probable future economic benefits.
• The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
• Its ability to reliably measure the expenditure attributable to the intangible asset during its development.

This means that development costs can only be recognised as an intangible asset if all of the above criteria are met.

Thus, the statement that IFRS requires all R&D costs to be expensed as incurred is partially correct.While it is always true for research cost,it may or may nit be always true for development costs.

The reasoning for the above treatment is that when any thing is in research stage ,it is basically a try n error stage and there is no certainity of anything worth materialising from all the costs incurred and yet it is related to business so it is expensed.Now after the research is completed it is easy to identify whether the research stage has resulted into something useful which can be applied for future benefits,The development if results into some intangible assets as defined in IAS 38 then it is trated as intangible asset or else it is expensed.The logic is simple that if it can be developed and used then it is a capital generation which will give certain future benefits and is not not an expense.