Statement of Financial Accounting Standards No. 2 - FASB

1 Statement ofFinancial AccountingStandards No. 2 FAS2 Status PageFAS2 SummaryAccounting for Research andDevelopment CostsOctober 1974 Financial Accounting Standards Boardof the Financial Accounting Foundation401 MERRITT 7, BOX 5116, NORWALK, CONNECTICUT 06856-5116 Copyright 1974 by Financial Accounting Standards board . All rights reserved. Nopart of this publication may be reproduced, stored in a retrieval system, or transmitted, inany form or by any means, electronic, mechanical, photocopying, recording, orotherwise, without the prior written permission of the Financial Accounting 2 Statement of Financial Accounting Standards No.

2 2 Accounting for Research and Development CostsOctober 1974 CONTENTSP aragraphNumbersIntroduction .. 1 6 Standards of Financial Accounting and Reporting:Activities Constituting Research and 7 10 Elements of Costs to Be Identified with Research and Development Activities .. 11 Accounting for Research and Development Costs .. 12 Disclosure .. 13 14 Effective Date and 15 16 Appendix A: Background 17 22 Appendix B: Basis for Conclusions .. 23 64 Page 3 Copyright 1974, Financial Accounting Standards board Not for redistributionFAS 2: Accounting for Research and Development CostsINTRODUCTION1.

3 This Statement establishes Standards of Financial Accounting and reporting for research anddevelopment costs with the objectives of reducing the number of alternative Accounting andreporting practices presently followed and providing useful Financial information about researchand development costs. This Statement specifies:a. Those activities that shall be identified as research and development for Financial accountingand reporting The elements of costs that shall be identified with research and development The Accounting for research and development The Financial Statement disclosures related to research and development Accounting for the costs of research and development activities conducted for others undera contractual arrangement is a part of Accounting for contracts in general and is beyond the scopeof this

4 Statement . Indirect costs that are specifically reimbursable under the terms of a contractare also excluded from this This Statement does not apply to activities that are unique to enterprises in the extractiveindustries, such as prospecting, acquisition of mineral rights, exploration, drilling, mining, andrelated mineral development. It does apply, however, to research and development activities ofenterprises in the extractive industries that are comparable in nature to research and developmentactivities of other enterprises, such as development or improvement of processes and techniquesincluding those employed in exploration, drilling, and APB Opinion No.

5 17, "Intangible Assets," is hereby amended to exclude from its scopethose research and development costs encompassed by this Paragraph 13 of APB Opinion No. 22, "Disclosure of Accounting Policies," is amended todelete "research and development costs (including basis for amortization)" as an example ofdisclosure "commonly required" with respect to Accounting Standards of Financial Accounting and reporting for research and development costs are setPage 4 Copyright 1974, Financial Accounting Standards board Not for redistributionforth in paragraphs 7-16.

6 The basis for the board 's conclusions, as well as alternativesconsidered by the board and reasons for their rejection, are discussed in Appendix B to thisStatement. Background information is presented in Appendix OF Financial Accounting AND REPORTINGA ctivities Constituting Research and Development7. Paragraphs 8-10 set forth broad guidelines as to the activities that shall be classified asresearch and For purposes of this Statement , research and development is defined as follows:a.

7 Research is planned search or critical investigation aimed at discovery of new knowledgewith the hope that such knowledge will be useful in developing a new product or service(hereinafter "product") or a new process or technique (hereinafter "process") or in bringingabout a significant improvement to an existing product or Development is the translation of research findings or other knowledge into a plan or designfor a new product or process or for a significant improvement to an existing product orprocess whether intended for sale or use.

8 It includes the conceptual formulation, design, andtesting of product alternatives, construction of prototypes, and operation of pilot plants. Itdoes not include routine or periodic alterations to existing products, production lines,manufacturing processes, and other on-going operations even though those alterations mayrepresent improvements and it does not include market research or market testing The following are examples of activities that typically would be included in research anddevelopment in accordance with paragraph 8 (unless conducted for others under a contractualarrangement see paragraph 2):a.

9 Laboratory research aimed at discovery of new Searching for applications of new research findings or other Conceptual formulation and design of possible product or process Testing in search for or evaluation of product or process Modification of the formulation or design of a product or Design, construction, and testing of pre-production prototypes and Design of tools, jigs, molds, and dies involving new Design, construction, and operation of a pilot plant that is not of a scale economicallyfeasible to the enterprise for commercial Engineering activity required to advance the design of a product to the point that it meetsspecific functional and economic requirements and is ready for 5 Copyright 1974, Financial Accounting Standards board Not for redistribution10.

10 The following are examples of activities that typically would be excluded from researchand development in accordance with paragraph 8:a. Engineering follow-through in an early phase of commercial Quality control during commercial production including routine testing of Trouble-shooting in connection with break-downs during commercial Routine, on-going efforts to refine, enrich, or otherwise improve upon the qualities of anexisting Adaptation of an existing capability to a particular requirement or customer's need as part ofa continuing commercial Seasonal or other periodic design changes to existing Routine design of tools, jigs, molds, and Activity, including design and construction engineering, related to the construction,relocation, rearrangement, or start-up of facilities or equipment other than (1) pilot plants(see paragraph 9(h))