What is Research and Development Accounting?

Research and Development Accounting

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Research and Development Accounting

Research and Development (R&D) Accounting refers to the methods and practices used to account for and report the costs associated with the R&D activities of an entity. Given the significance of R&D for many businesses, especially in industries like pharmaceuticals, technology, and automotive, it’s crucial to understand how these costs are recognized and treated in financial statements.

Key Aspects of R&D Accounting:

Example of Research and Development Accounting

Let’s delve into a more detailed example to understand the intricacies of Research and Development (R&D) accounting:

InnovateTech, a fictional tech company, is working on the development of an advanced wearable health monitoring device. During the fiscal year 2023, the company incurs the following costs:

  • Research Costs:
    • Preliminary research to understand the market demand and potential technologies: $2 million
    • Studies to identify potential health metrics the device can monitor: $1 million
  • Development Costs:
    • Design and prototype of the wearable device: $5 million
    • Testing of the prototype: $2 million
    • Patent filing and legal fees related to the device: $0.5 million

For our example, we’ll consider the accounting treatment under both U.S. GAAP and IFRS:


Under U.S. GAAP, all R&D costs are expensed as incurred.

  • Total R&D Expense for 2023: $2 million + $1 million + $5 million + $2 million = $10 million
  • The patent filing and legal fees ($0.5 million) related to the device would also typically be expensed.
  • Thus, InnovateTech’s income statement for the year 2023 will show an R&D expense of $10.5 million, reducing the company’s net income by this amount.


Under IFRS, research costs are expensed, but development costs can be capitalized once certain criteria (like demonstrating the product’s viability and the intention to complete and sell the product) are met.

  • Total Research Expense for 2023: $2 million + $1 million = $3 million (This is expensed in the income statement)

Assuming InnovateTech can demonstrate the device’s viability and their intention to complete its development:

  • Development Costs to be capitalized as an intangible asset: $5 million + $2 million = $7 million

The $0.5 million for patent filing and legal fees would also be capitalized as it adds to the value of the intangible asset.

  • Thus, InnovateTech’s balance sheet at the end of 2023 would show an intangible asset of $7.5 million. This asset will be amortized over its useful life in the subsequent years.

This example demonstrates how R&D costs can have a different impact on financial statements based on the accounting standards in use. Under U.S. GAAP, the entire R&D outlay impacts the company’s profit and loss in the year the costs are incurred. Under IFRS, a portion of the costs (related to development) can be deferred to future periods through capitalization and subsequent amortization.

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