Research and Development (R&D) costs refer to the expenses incurred in activities aimed at discovering or improving knowledge or products. R&D costs are typically expensed as they are incurred since the future benefits of these costs are uncertain. However, there are some cases where R&D costs can be capitalized if certain criteria are met.
To capitalize R&D costs, the following criteria must be met:
- The research and development must be aimed at creating a new product or improving an existing product.
- The technical feasibility of the product must be established.
- The company must have the intention and ability to use or sell the product.
- The company must be able to measure the cost of the project reliably.
If these criteria are met, the R&D costs can be capitalized as an asset on the balance sheet. The capitalized R&D costs are then amortized over the expected useful life of the product.
If the criteria are not met, R&D costs should be expensed in the income statement when they are incurred. R&D costs are typically reported in the income statement as a separate line item and may be included in the operating expenses or listed separately.