Treatment of Research & Development cost

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:

  1. The research and development must be aimed at creating a new product or improving an existing product.
  2. The technical feasibility of the product must be established.
  3. The company must have the intention and ability to use or sell the product.
  4. 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.

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