Under United States generally accepted accounting principles (U.S. GAAP), ordinary research and development costs are expensed as incurred. Expected commercial success does not provide independent capitalization authority, and later success does not restore previously expensed costs to an asset.
Research investigates scientific or technical questions to obtain new knowledge potentially useful in products, services, or processes. Development applies knowledge to designing a new product or process, or making a substantial improvement before commercial production or use.
Research and development costs therefore include both exploration and practical experimentation. The activity's purpose determines classification, even when the employee's department name or the invoice description suggests a different function.
Activities receive the following classifications.
Research and development costs include directly attributable resources and reasonable indirect allocations. The calculation follows the work performed, resources consumed, and applicable asset rules rather than a department's cash payments or total budget.
The cost register separates these components.
Allocated research and development costs must exclude duplication. Laboratory supervision already included in personnel costs cannot appear again within overhead, and corporate administration cannot be assigned merely to increase reported...
Common mistakes
- Allocating unsupported administration. Adding Lydell's unrelated corporate administration produces , an overstated research total.
- Ignoring unpaid performance. Excluding completed but unpaid services produces ; payment status does not reverse the accrual.
- Expensing the reusable machine. Replacing Equipment B's research depreciation with its purchase price produces .
Bottom line
- Ordinary research and development costs are expensed as incurred; expected success alone supplies no capitalization authority.
- Research expense includes qualifying personnel, consumed materials, performed services, and reasonable related overhead, excluding unrelated operating activities.
- Separately acquired research assets without alternative future use are expensed; qualifying reusable assets contribute research-use depreciation or amortization.
- Nonrefundable advances remain prepaid while future benefits are expected, with expense following performance or loss of recoverability.
Exam shortcut
Start by identifying whose financial statements are required. Separate the research purchaser from the contractor and inspect substantive repayment terms when funding appears. Mark each register item as current expense, future-service prepayment, or acquired asset before adding amounts. Then remove production, marketing, and patent legal work from the research column. For acquired assets, check business combination versus asset acquisition first.
The full lesson (about 4,565 words, 30 min read) adds 3 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- II.E1
Browse all free CPA BAR lessons or jump into free CPA BAR practice questions.