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Research and Development Expenditure

Expenditure on the research phase

Research means trying out different possibilities and checking their outcomes. It has an element of trial and error. People expect a particular outcome but are not certain about it. Examples of research expenditure are activities aimed at obtaining new knowledge, and the search for new materials, devices, products and processes.

Expenditure on research should be recognized as an expense and not as an intangible asset. The reason is that, normally, at this stage an entity cannot demonstrate that an asset exists and that future economic benefits will flow from it. The expenditure therefore does not satisfy the definition of an asset.

Examples of research activities include:

i) activities aimed at obtaining new knowledge;

ii) the search for, evaluation and final selection of, applications of research findings or other knowledge;

iii) the search for alternatives for materials, devices, products, processes, systems or services; and

iv) the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

Expenditure on the development phase

An asset resulting from development should be recognized as an intangible asset if, and only if, an entity can demonstrate all of the following:

  1. the technical feasibility of completing the intangible asset so that it will be available for use or sale;

  2. its intention to complete the intangible asset and use or sell it;

  3. its ability to use or sell the asset;

  4. the probability that the asset will generate future economic benefits - among other things, the entity must demonstrate the existence of a market for the output of the asset or the asset itself or, if it is to be used internally, the usefulness of the asset;

  5. the availability of adequate technical, financial and other resources to complete the development and to use or sell the asset; and

  6. its ability to measure reliably the expenditure attributable to the asset during its development.


AV Ltd, a pharmaceuticals company undertook a project to develop a more effective drug to fight a disease common during winters. A team of scientists was engaged to obtain new knowledge, materials and processes. The team continued to do experimentation through trial and error on various species and breeds of animals. The amount expensed during the phase was $5 million. This is a research phase, and expenditure incurred during this phase is charged to the SOCI.

Later, AV Ltd arrived at a unique proven formula. The processes were drafted and identified. Testing was done repeatedly and on a large scale. Patents were registered for the process. AV Ltd certainly could now complete the project and exploit it commercially, and that the improved cost-effective formula will generate substantial sales.

The recognition criteria for development are met at this stage. This is a development phase. Expenditure on this phase amounted to $15 million are capitalized as intangible assets.

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognized as intangible assets. The reason is that expenditure on these items cannot be distinguished from the cost of developing the business as a whole

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