is research and development capitalized or expensed

Is Research and Development Capitalized or Expensed?

Let us uncover the answer to the question, “Is research and development capitalized or expensed?”

Research and development (R&D) activity is defined as the systematic application of knowledge and techniques to create new products or production methods or to improve existing products or production methods.

The costs of research and development are expensed as incurred, until the point where it is determined that the R&D activities will generate future economic benefits. 

At that point, the costs of R&D activities are capitalized and amortized on a straight-line basis over the estimated useful life of the R&D assets created.

So, Is Research and Development Capitalized or Expensed?

Research and development costs should be capitalized, not expensed. For one reason, R&D is an investment.

When a company spends money to research a new product or production method, that company expects a return on its investment. 

In other words, it expects to be able to use the new product or production method in the future and to generate income from it.

Because R&D activities are considered an investment in the future economic benefits of a company, they should not be expensed. 

Instead, they should be capitalized and amortized over the life of the product or production method being researched.

In many cases, R&D activities can be used in more than one period. So R&D costs can be amortized over a number of years. 

As a result, R&D costs may never be fully expensed in the income statement. Instead, they may be expensive in parts over many years.

How Are Research and Development Costs Capitalized?

There are three methods by which you capitalize R&D costs:

  • Full cost method 
  • Successful efforts method 
  • Unsuccessful efforts method 

The full cost method is the most common. Under this method, an entire cost is capitalized when it is incurred. And that is true even if only a portion of the cost is actually for R&D activity. 

The successful efforts method capitalizes only those costs associated with successful R&D projects; unsuccessful R&D projects are expensed. 

The unsuccessful efforts method capitalizes both successful and unsuccessful R&D projects, but expenses any costs associated with unsuccessful R&D projects. 

Why Are Research and Development Costs Capitalized?

The basic reason that companies capitalize on R&D costs is that they expect to be able to use the results of the research in the future. Then, they can generate an income from it. 

In other words, they expect to be able to sell their new product or production method. So, they can generate revenue from it. 

So, companies capitalize on R&D costs to make it easier to see the benefits of their R&D activity in the future. They treat the costs like an investment in the future economic benefits of their company.

Conclusion

In this article, we learned that research and development costs should be capitalized, not expensed. 

Research and development costs are an investment in the future economic benefits of a company, so they should be capitalized.

Capitalizing on research and development costs is essential because you expect to be able to use the results of your R&D activity in the future and generate an income from it.

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