Research and Development Costs

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RESEARCH AND DEVELOPMENT COSTS

Intangible assets are items that the firm purchased but that lack physical substance. Their value to the firm is often dependent on other business factors and is subject to considerable uncertainty. In many instances, such assets have value only in the context of a particular business and therefore cannot be transferred to another organization. Because of the uncertainty surrounding the value of these items, they are frequently recognized at only a nominal amount in the financial statements or expensed at time of acquisition. Yet intangibles could represent a significant amount of the economic resources of a company. Intangible resources may be purchased from others or developed internally by a company. Although purchased intangibles are generally recorded as assets, self-developed intangibles are not. Thus, a patent purchased from another company would be shown at its cost as an asset on the balance sheet, whereas a similar patent developed through the company’s own research and development efforts would not. The costs of research and development present a difficult problem for the accountant. In the past, these costs were frequently capitalized and regarded as an intangible asset. But because there is an uncertain relationship between research spending and subsequent benefits, the Financial Accounting Standards Board (FASB) in Financial Accounting Standard 2 decided that all research and development costs should be expensed. Thus, accountants must now charge all research costs to current expenses. It should be realized, however, that research costs are usually incurred with the expectation of benefiting future periods rather than the present period. Theoretically, such costs are assets, even if they are expensed for purposes of conforming to the reporting requirements of the FASB.

The cost deferral concept emphasizes income determination and is directly related to the accepted definition of accounting income. The...
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