Research and Development
- 01:52
Understand that research costs are expensed and development costs may be capitalized in certain circumstances
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Glossary
R&D R&D Expense Research & DevelopmentTranscript
Research and development (often short handed to R&D) is very useful in coming up with new non-current assets For instance, coming up with a brand new machine of your own It's useful to understand how the costs incurred with research and development can be included within non-current assets Let's start with research. Research refers to costs aimed at the discovery of new knowledge Now these have to be expensed as incurred i.e. the full cost of the research each year just goes through the income statements If you're able to eventually come up with a new machine worth 10,000 you can't add on the research cost of 100 Your machine will not be in the balance sheet at 10,100. It will just be in there at the 10,000 The 100 went through the income statement expensed, maybe last year. It's gone Development is slightly different Development translates research into a plan or design of a new product or process (in my example a machine) These costs can be capitalized. So going back to my last example, maybe you've got a machine The actual machine itself, costs incurred were 8,000 but development costs were another 2,000 You would be able to add the 8,000 and 2,000 together and have the machine in your financial statement at a value of 10,000 Remember, you can't add on the value of research on to that It's important to realize that it's slightly different in the U.S. Under U.S. rules, both research and development are expensed apart from software related research and development costs There are separate rules governing software related R&D