Accounting for Research and Development Costs

1 Statement of Accounting StandardsAAS 13 March 1983 Accounting for Researchand Development CostsPrepared by theAccounting Standards Board of theAustralian Accounting Research FoundationThe National Councils of The Institute of Chartered Accountants inAustralia and the Australian Society of Accountants issue the followingStatement of Accounting Standards relating to " Accounting for Researchand Development Costs ". It is operative in respect of any Accounting periodending on or after 31 December by theAustralian Society of Accountants andThe Institute of Chartered Accountants in AustraliaCONTENTSP aragraphsINTRODUCTION ..1-3 DEFINITIONS ..4 DISCUSSIONA ctivities to be Identified as Research andDevelopment ..5-10 Elements of Costs to be Identified with Research andDevelopment Activities ..11-13 Accounting Treatment of Research and DevelopmentCosts.

2 14-17 Research ..18-21 Development ..22-23 Research and Development Costs Previously Writtenoff ..24 Amortisation of Deferred Research and DevelopmentCosts ..25 Accounting Treatment of Government Grants Receivedin Relation to Research and Development ..26 Disclosure of Research and Development Information .27-28 Accounting STANDARDSD efinitions to be Read is Part of Standards ..29 Elements of Costs to be Identified with Research andDevelopment Activities ..30 Accounting Treatment of Research and DevelopmentCosts ..31-34 Accounting Treatment of Government Grants Receivedin Relation to Research and Development ..35-36 Research and Development Costs Previously Writtenoff ..37 Disclosure of Research and Development Information .38 Transitional Arrangements ..39 COMPATIBILITY WITH INTERNATIONAL ACCOUNTINGSTANDARD IAS 9 INTRODUCTION1 The objectives of this Statement are to ensure that financialstatements provide useful information about the Costs of researchand Development activities and to reduce the number of alternativeaccounting and reporting practices currently followed with respectto these Statement establishes standards for:(a)the activities to be identified as Research and Development ;(b)the elements of Costs to be associated with Research anddevelopment activities;(c)the methods of Accounting for Research and developmentcosts;(d)the treatment of government grants received in relation toresearch and Development .

3 And(e)the disclosure of information related to Research anddevelopment Statement does not apply to the cost of:(a) Research and Development activities conducted for othersunder contract; and(b)specialised activities, in extractive industries, related to theexploration for and extraction of oil and natural gasreserves and mineral Statement does apply, however, to those activities inthe extractive industries which are comparable in nature tothe Research and Development activities of other the purposes of this Statement:(a)" Research " means planned investigation undertakenwith the hope of gaining new scientific or technicalknowledge and understanding which will be useful indeveloping a new product or service (hereinafter"product"), or a new process or technique (hereinafter"process"), or in bringing about a significantimprovement to an existing product or process.

4 (b)" Development " means the translation of researchfindings or other knowledge into a plan or design for anew product or process or for a significantimprovement to an existing product or to be Identified as Research and Development5 Identifying the activities to be classified as Research anddevelopment is important in Accounting for Research anddevelopment Costs . If these activities are not identified on aconsistent and relatively uniform basis, comparative analysis offinancial statements will be adversely the nature of activities encompassed by Research anddevelopment is generally understood, it may be difficult in practiceto identify those activities in particular instances. This difficultywill be particularly apparent in segregating Development activitiesfrom production activities. This Statement provides broaddefinitions which should assist entities in their classification ofresearch and Development following are examples of activities that typically would beincluded in Research :(a) Research aimed at discovery of new knowledge;(b)searching for applications of new Research findings orother knowledge;(c)formulation and design of possible new or improvedproduct or process alternatives; and(d)testing in search for product or process following are examples of activities that typically would beincluded in Development :(a)evaluation of product or process alternatives;(b)design, construction, and testing of pre-productionprototypes and models;(c)design of tools, jigs, moulds, and dies involving newtechnology.

5 And(d)design, construction, and operation of a pilot plant that isnot of a scale economically feasible for commercialproduction. 9 The following are examples of activities that typically would beexcluded from Research and Development in accordance withparagraphs 4(a) and 4(b):(a)engineering follow-through in an early phase ofcommercial production;(b)quality control during commercial production, includingroutine testing of products;(c)"trouble-shooting" in connection with break-downs duringcommercial production;(d)routine, on-going efforts to refine, enrich or otherwiseimprove upon the qualities of an existing product;(e)adaptation of an existing capability to a particularrequirement or customer's need as part of a continuingcommercial activity;(f)seasonal or other periodic design changes to existingproducts;(g)routine design of tools, jigs, moulds, and dies.

6 And(h)activities, including design and construction engineering,related to the construction, relocation, rearrangement, orstart-up of facilities or equipment other than facilities orequipment whose sole use is for a particular Research anddevelopment or promotional market Research and market testingactivities are not in the nature of Research and developmentactivities. However, market Research undertaken to establish theexistence and extent of a potential market, prior to thecommencement of commercial production, is similar in nature todevelopment and may be treated as a Development of Costs to be Identified with Research and DevelopmentActivities11In order to achieve a reasonable degree of comparability amongentities and over time for a particular entity, it is important that theelements comprising Research and Development Costs be identifiedwith Research and Development activities on a consistent anduniform basis.

7 Although it is not practicable to specify in detail theelements of Research and Development Costs which would beapplicable to all entities, it is possible to specify the broad costelements which are likely to have general cost of materials and services consumed in Research anddevelopment activities, and the salaries, wages and other relatedcosts of personnel engaged in Research and Development activitiesought to be included as Research and Development Costs . Whereother entities have incurred Costs on Research and developmentactivities on behalf of the entity and have charged the entity forreimbursement, such Costs also ought to be included as Research anddevelopment Costs . In addition, those other Costs that can bedirectly attributed to Research and Development activities and thatcan be identified with specific projects ought to be cost of the service potential of assets consumed in Research anddevelopment activities ought to be included as Research anddevelopment Costs .

8 This would include the depreciation ofequipment and facilities, to the extent that they are used forresearch and Development activities, and the amortisation of patentsand licences, to the extent that they are related to Research anddevelopment for Research and Development Costs14 The Costs of Research and Development activities could be treated,for Accounting purposes, as an expense and be charged to the profitand loss account in the period in which they are incurred, or bedeferred and amortised over future periods in order to match thecosts of the activities with the benefits which derive from incurred during the period ought to be deferred only to theextent that future benefits deriving from those Costs are expected,beyond any reasonable doubt, to equal or exceed those Costs , anypreviously deferred Costs , and any future Costs necessary to give riseto the future benefits.

9 Future Costs may include production, sellingand administration Costs and additional Research and nature of most Research and Development activities is such thatat the time Costs are incurred the amount and timing of futurebenefits may be too improbable to justify deferral. However, theremay be certain instances where the Costs warrant or not particular Research and Development Costs could beexpected to meet the test for deferral will depend to a large extenton the nature of the activities to which they relate. It is more likelythat the Costs of Development activities would meet the test than thecosts of Research activities are undertaken in the early stages of an entity'sresearch and Development program and are concerned with, ingeneral terms, original investigation. As such, the activities willnot normally be associated with identifiable projects and therelationship between the Costs incurred on these activities and anyresulting future benefits would normally be distant.

10 However, onrare occasions the Costs of certain Research activities mayreasonably be expected to give rise to future benefits and, therefore,may meet the test for activities can be segregated into two types basicresearch and applied Research can be broadly defined as original investigationdirected primarily towards the advancement of knowledge. It isundertaken without a specific practical aim or application and,consequently, there would rarely exist any relationship betweencosts incurred on these activities and resulting future benefits. Theview adopted in this Statement is that the Costs of basic researchought to be treated as Costs incurred by an entity in carrying out itsrevenue earning process during a period. As such, these costsought to be charged to expense in the period in which they Research can be broadly defined as original investigationdirected primarily towards solving recognised practical basic Research it is undertaken with a specific practical aimor application.