Jose ?- it sounds like you work at a company that does R&D. Maybe you could ask someone in accounting how they expense R&D. I think a company can expesnse some R&D and no must capitalize other R&D per year, Patents, etc.... i am pretty sure have to be amortized over time. Startup costs work somewhat the same way.
of course some can be expensed right away but other stuff not so much.
I am wondering, maybe one could look at the balance sheet and see how much is in R&D. this would get reduced as an expense over time. And get added to with Current R&D that could not be expensed right away
Small Business > Accounting & Bookkeeping > Expenses
Why Are R&D; Expenses Not Capitalized?
by Cam Merritt, studioD
The future economic benefit of research is often impossible to determine.
The future economic benefit of research is often impossible to determine.
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Accounting rules define an asset as something with future economic benefits, so it's natural to ask why research and development costs can't be capitalized and treated as an asset rather than an expense, which is what the rules require. After all, the whole purpose of "R&D" is to realize future economic benefit. According to the Financial Accounting Standards Board, the rule-making body for U.S. business accounting, the answer lies in the difficulty of quantifying those future benefits.
Capitalization Effects
Whether R&D costs should be capitalized or treated as expenses isn't just a technical question about accounting procedures. It has a direct impact on the most basic calculations of a company's value and profitability. If your business could capitalize its R&D, then your balance sheet would show more assets, which would increase the value of the company. At the same time, because the costs wouldn't be treated as expenses, your company's profits, at least on paper, would be higher. For a small or start-up company that has significant R&D costs, that could make the difference in securing the investor capital needed to grow.
Uncertain Benefits
The main reason companies aren't allowed to capitalize their research and development costs is that there's no way to reliably measure the future economic benefits of those costs. R&D involves trial and error -- a lot of error. When it set the rules for R&D spending in the 1970s, the accounting standards board cited data showing that only 2 percent of product ideas become commercially viable, and only 15 percent of products that actually go into development become viable. When your company spends money on R&D, you have no way of knowing which projects will pan out -- that is, produce future benefits -- and which won't. Even if you could identify the projects that will work, you can't put an objective figure on what their benefits will be. And then there's the unresolved question of how to treat "failed" projects when later successes are built on the lessons learned from those failures.
Amortization Issues
Because it's so difficult to draw direct cause-and-effect relationships between specific amounts of R&D spending and future economic benefits, it would be impossible to follow one of the fundamental principles of business accounting: the "matching principle." This principle holds that whenever you report revenue, you must at the same time report the expenses incurred in generating that revenue. This is why companies depreciate "hard assets" such as vehicles and equipment. If you buy a $25,000 truck that will last 10 years -- in other words, help you generate revenue for 10 years -- you first capitalize the $25,000 and then take a depreciation expense each year for the next 10 years until the truck is fully depreciated. Similarly, intangible assets -- which is what a hypothetical R&D asset would be -- are amortized over time to match them with the revenue they produce. If it's not possible to directly match R&D expenses with revenue, then the asset can't be amortized. For these reasons, accounting rules require that all R&D costs be treated as expenses when they are incurred.
"In Process" R&D
There's one exception to the rule against capitalizing research and development costs. If your business buys another company, you must capitalize any "in process" R&D projects that come with the purchase. The rationale behind this exception is that some portion of the price you paid to acquire the company was allocated to those projects, so the projects have a definable value that you can list as an asset. Say you buy out a competitor for $250,000. As you combine your companies' finances, you'll allocate a portion of that $250,000 to the competitor's R&D projects, and then report that amount as an asset. When the R&D project is completed, one of two things will happen. If the project doesn't produce tangible results, you'll report an expense for the full amount of the asset -- you'll "write it off," in other words. If the project bears fruit, you'll have to assign a "life span" to the benefits of the project and then amortize the asset over that life span.
References (4)
About the Author
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.
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Research and Development Costs
SFAS 2, October 1974
"Accounting for Research and Development Costs"
General rule for research and development costs
Research and development costs are
--> charged to expense when incurred
--> because future economic benefits are uncertain
Research and development (R&D) costs
1. tangible assets
2. intangible assets
3. personnel costs
4. indirect costs
5. contract costs
6. computer software costs
Tangible assets acquired for R&D activities
1. If the assets have alternative future uses
--> capitalized as an asset
--> cost of consumption or depreciation is charged to expense
2. If the assets do not have alternative future uses
--> expensed at the time of acquisition
Intangible assets acquired for R&D activities
1. If the assets have alternative future uses
--> capitalized as an asset
--> amortization is charged to expense
2. If the assets do not have alternative future uses
--> expensed at the time of acquisition
Personnel costs, indirect costs, contract costs
--> expensed when incurred
Computer software costs
1. Software developed internally for R&D activities
--> all costs are expensed when incurred
--> alternative future uses are not considered
--> development phases are not considered
2. Software purchased for R&D activities
(1) if the software has alternative future uses
--> capitalize as an intangible asset
--> amortization is charged to expense
(2) if the software does not have alternative future uses
--> expensed when incurred
