Question

In: Finance

According to U.S. GAAP, which of the following statements about research and development cost is most...

According to U.S. GAAP, which of the following statements about research and development cost is most correct?

Group of answer choices

A) Both research and development costs are capitalized.

B) Research costs are expensed when incurred, but development costs are capitalized.

C)Both research and development costs are expensed as incurred, unless the costs have an alternative use.

Solutions

Expert Solution

B) Research costs are expensed when incurred, but development costs are capitalized.

Update on IFRS issues in the US

Companies often incur costs to develop products and services that they intend to use or sell. The accounting for these research and development costs under IFRS can be significantly more complex than under US GAAP

Under US GAAP, R&D costs within the scope of ASC 7301 are expensed as incurred. US GAAP also has specific requirements for motion picture films, website development, cloud computing costs and software development costs.

Under IFRS (IAS 382), research costs are expensed, like US GAAP. However, unlike US GAAP, IFRS has broad-based guidance that requires companies to capitalize development expenditures, including internal costs, when certain criteria are met.

Based on these criteria, internally developed intangible assets (e.g. development expenses related to a prototype in the automotive industry) are generally capitalized and amortized under IFRS and expensed under US GAAP. This difference gives rise to two complexities in applying IFRS: distinguishing development activities from research activities, and analyzing whether and when the criteria for capitalizing development expenditures are met


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