Research and Development

Reseach phase and Development phase

If the phase cannot be distinguish, the entity treats the expenditure as as if it were incurred in the
research phase only.

Research

 Original and planned investigation undertaken with the preospect of gaining scientifiic or
technical knowledge and understanding.
 A reserch activity is undertaken to discover new knowledge that will be useful in developing new
product or that will result in significant improvementof existing product.

Accounting for research cost

 Expenditure on research or on the research phase of an internal project shall be expensed when
incurred

Development Cost

 Application of research findings or other knowledge to a plan or design for the production of
new or substantially improved material, device, product, process, system or service prir to the
commencement of commercial production.
 Apllication of research findings to develop a new product.

Accounting for development cost

Development cost incurred in later stage in a poject and the probability of success may be more
apparent

it may or may not be recognized as an intangible asset depending on a very strict criteria.

CRITERIA FOR RECOGNITION

Development cost my qualify as intangible asset if and only if the entity can demonstrate all of the
following:

a. he technical feasibility of completing the intangible asset so that it will be available for use or
sale. This is achieved when a prototype or model s produced
b. The intention to complete the intangible asset and use or sell it
c. The ability to use or sell th intangible asset.
d. How the intangible asset will generate probable future economic benefits.
e. Availability of resources or funding to complete development and to use or sell the asset.
f. The ability to measure reliably the expenditure attributable to the intangible asset during the
development.
Cost incurred for materials, equipment, and intangible asset related to research and development
activities which have an alternative future use can be capitallized.

Subsequently these are charged to R&D Expense:

a. Cost of material used

b. Dep of equipment used in R&D

c. amortization of intangible asset used in R&D

ACTIVITIES NOT CONSIDERED R&D

R&D activities typically occur prior to the beginning ofa commercial production and distribution ofa
product or process.

Activities that relae to Commercial production do not result to R&D

Internally Developed Software

Cost incurred in creating a computer software product shall be charged to expense when incurred until a
technical feasibility has been established for the product.

After technical feasibility has been established, capitalizable software cost include the cost of coding and
testing and the cost to produce the product masters.

 As a rule, computer software is an intangible asset

 Computer software purchased for resale shall be treated as inventory
 A computer software purchased as an integral part of a computer controlled machine tool that
cannot operate without the specific software shall be treated as PPE. However, if the computer
software is not an integral part off the related hardware, it is classified as an intangible asset.