In this era of
rapidly changing technology, research and development (R&D)
expenditures represent one of the most important factors in the future
success of many companies. Organizations that spend too little on
R&D risk being left behind by the competition. Conversely, companies
that spend too much may waste money or not be able to make efficient
use of the results.
In the United States, all R&D expenditures are expensed as
incurred. However, expensing all R&D costs is not an approach used
in much of the world. Firms using IFRS must capitalize development costs
as an intangible asset when they can demonstrate (1) the technical
feasibility of completing the project, (2) the intention to complete the
project, (3) the ability to use or sell the intangible asset, (4) how
the intangible asset will generate future benefits, (5) the availability
of adequate resources to complete the asset, and (6) the ability to
measure development costs associated with the intangible asset.
Should any portion of R&D costs be capitalized? Is expensing all
R&D expenditures the best method of reporting these costs? Is the
U.S. approach better than the international standard? Which approach
provides the best representation of the company’s activities?