ASC 730, Research and Development, contains two subtopics:
ASC 730 applies to all entities and to “activities aimed at developing or significantly improving a product or service (referred to as product) or a process or technique (referred to as process) whether the product or process is intended for sale or use.” (ASC 710-30-15-3)
ASC 730 does not apply to:
(ASC 730-10-15-4 and 5)
Note: the following is effective upon implementation of ASU 2014-09, Revenue from Contracts with Customers. ASC 730-20 does applies to arrangements for software development fully or partially funded by a party other than the vendor developing the software, and where technological feasibility has not been established. If the technological feasibility has been established, the guidance in ASC 730-20 does not apply. Neither does it apply to government research and development. (ASC 730-20-15-1A and 4)
ASC 730 addresses the proper accounting and reporting for research and development costs. It identifies:
(ASC 730-10-05-1)
The central issue in regard to research and development costs is that the future benefits related to these expenditures are uncertain. Given this uncertainty, it is generally difficult to justify classifying them as an asset. Generally, entities should charge them to expense as incurred. (ASC 730-10-05- 2 and 3)
Source: ASC 710-10-20 and ASC 710-20-20. Also see the Definition of Terms Appendix for other terms relevant to this Topic: Probably, Related Parties.
Research and Development. Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service (referred to as product) or a new process or technique (referred to as process) or in bringing about a significant improvement to an existing product or process.
Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. It includes the conceptual formulation, design, and testing of product alternatives, construction of prototypes, and operation of pilot plants.
Sponsor. An entity that capitalizes a research and development arrangement.
There are three ways in which R&D costs are incurred by a business:
The accounting treatment relative to R&D depends upon the nature of the cost. R&D costs incurred in the ordinary course of operations consist of materials, equipment, facilities, personnel, and indirect costs that can be attributed to research or development activities. These costs are expensed in the period in which they are incurred unless they have alternative future uses. Examples of such R&D costs with alternative future uses include:
(ASC 730-10-55-1)
Examples of costs that are not considered R&D include:
(ASC 730-10-55-2)
In many cases, entities will pay other parties to perform R&D activities on their behalf. Substance over form must be used in evaluating these arrangements. A financial reporting result cannot be obtained indirectly if it would not have been permitted if accomplished directly. Thus, if costs are incurred to engage others to perform R&D activities that, in substance, could have been performed by the reporting entity itself, those costs must be expensed as incurred.
An alternative arrangement may consist of a business entering into a limited partnership where the limited partners provide funding and the business conducts the research under a contract with the partnership. Under such an arrangement, the partnership may retain legal ownership of the results of the research. The business may have an option to buy back the results of the research upon payment of a stipulated amount to the partnership.
On the other hand, if the payment is to acquire intangibles for use in R&D activities, and these assets have other uses, then the expenditure is capitalized and accounted for in accordance with ASC 350.
When R&D costs are incurred as a result of contractual arrangements, the nature of the agreement dictates the accounting treatment of the costs involved. The key determinant is the transfer of the risk associated with the R&D expenditures. Risk is not transferred to the other parties if there is a commitment by the business to repay the other parties. Examples of commitments to repay are:
(ASC 730-20-25-4)
If the business receives funds from another party to perform R&D and is obligated to repay those funds regardless of the outcome, a liability must be recorded and the R&D costs expensed as incurred. To conclude that a liability does not exist, the transfer of the financial risk must be substantive and genuine.
Entities conducting R&D activities may make payments in advance for goods or services to be used in R&D activities. Often, these payment arrangements involve a specific R&D project and the R&D activities to be performed generally have no alternative future use at the time the arrangements are entered into. All or a portion of the advance payment may be nonrefundable to the entity conducting the R&D activities. For example, if the R&D project does not advance to a stage where the goods or services that were paid for in advance are necessary, the entity conducting the R&D activities will not recover its advance payments.
Nonrefundable advance payments are deferred and capitalized. (ASC 730-20025-13) As the related goods are delivered and services performed, the capitalized amounts are to be recognized as expense. (ASC 730-20-35-1) On a continuous basis, management should evaluate whether it expects the goods to be delivered or services rendered and to charge the capitalized advance payments to expense when there no longer is an expectation of future benefits.
This is limited to nonrefundable advance payments for goods to be used or services to be rendered in future R&D activities pursuant to an executory contractual arrangement where the goods or services have no alternative future use.
See ASC Location – Wiley GAAP Chapter | For information on… |
ASC 350-40 | The costs of internal-use computer software |
ASC 350-50 | Website development costs |
ASC 985-20-25-1 | Costs incurred to establish the technological feasibility of a computer software product to be sold, leased, or otherwise marketed |
ASC 985-605-25-86 through 25-87 Upon implementation of ASU 2014-09: ASC 730-25-15-1A and 958-20-25-12 |
A funded software development arrangement |
ASC 450-20 | Related to loss contingencies |
ASC 810-30 | Whether and how a sponsor should consolidate a research and development arrangement |
3.145.8.153