key term - R&D

Definition

R&D, or research and development, refers to the activities and processes involved in creating new products, services, or improving existing ones. It is a critical component in the context of accounting for intangible assets and recording related transactions.

5 Must Know Facts For Your Next Test

1. R&D expenditures can be either capitalized as an intangible asset or expensed in the current period, depending on the nature and stage of the project.
2. Successful R&D projects that result in the creation of an identifiable asset, such as a patent or software, can be capitalized and amortized over their useful life.
3. Unsuccessful R&D projects or the research phase of a project must be expensed immediately, as they do not meet the criteria for capitalization.
4. Capitalized R&D costs are subject to impairment testing to ensure the carrying value does not exceed the asset's recoverable amount.
5. Disclosure of R&D activities and related expenditures is required in the financial statements to provide information about a company's innovation and growth potential.

Review Questions

• Explain the criteria for capitalizing R&D expenditures as an intangible asset.
  • To capitalize R&D expenditures as an intangible asset, the project must be technically feasible, the company must have the intention and ability to complete the project, and the expenditures must be reliably measurable. Additionally, the asset created must be identifiable, and the company must have the resources to use or sell the asset. If these criteria are not met, the R&D expenditures must be expensed immediately.
• Describe the accounting treatment for successful and unsuccessful R&D projects.
  • Successful R&D projects that result in the creation of an identifiable intangible asset, such as a patent or software, can be capitalized on the balance sheet and amortized over the asset's useful life. Unsuccessful R&D projects or the research phase of a project, where the criteria for capitalization are not met, must be expensed immediately in the income statement. This distinction is important, as it reflects the uncertainty and risk associated with R&D activities.
• Discuss the importance of R&D disclosures in the financial statements and how they impact a company's performance evaluation.
  • Disclosure of R&D activities and related expenditures in the financial statements provides valuable information to stakeholders about a company's innovation efforts and growth potential. This information allows investors and analysts to assess the company's commitment to research and development, which can be an indicator of future competitiveness and market positioning. Additionally, R&D disclosures can help stakeholders understand the company's risk profile and the long-term viability of its business model, as successful R&D can lead to the creation of new revenue-generating products or services.

Related terms

Intangible Assets:

Intangible assets are non-physical assets that have long-term value for a company, such as patents, trademarks, copyrights, and goodwill.

Capitalization:

Capitalization is the process of recording an expenditure as an asset on the balance sheet, rather than expensing it immediately.

Amortization:

Amortization is the process of systematically allocating the cost of an intangible asset, such as R&D, over its useful life.