Businesses incur research and development costs in order to bring product differentiation, the launch of a new product etc. Such R&D costs have a special treatment and cannot be entirely treated as normal expenses. As per IFRS, research costs are expensed, however, in case of development costs (including internal costs) are capitalized provided certain conditions are met. This gives rise to the importance of differentiating a research cost from a development cost.
Costs related to an original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Example – Activities exploring alternatives to metal components that can be used in the manufacturing process.
Incurred in 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. Example – Activities likes constructing a new tool to manufacture a new product.
So when should a company start capitalizing on the development costs?
- When the company is able to estimate the technical feasibility of completing the asset so it is available for use or sale.
- Determine the intent of completing the product.
- Establish the ability to use or sell the asset.
- Determine if there is an availability of adequate resources to complete the product.
- When the company can reliably measure the expenditure attributable to the completion of the asset.