The development costs of a company are those costs incurred through the process of developing improved or new goods and services to meet consumers’ needs and, ideally, increase the company’s profits. Most U.S. companies adhere to generally accepted accounting principles in their accounting practices. However, a transition to international financial reporting standards has been slowly taking place since 2008. There are a few noteworthy differences in the handling of development costs under IFRS and GAAP.
Under both IFRS and GAAP, development costs usually go hand in hand with research costs, as a category known as research and development, which often get placed under the account heading of intangible assets. For accounting purposes, an intangible asset is defined as a non-monetary identifiable asset without any physical substance, such as patent, copyright, trademark or goodwill assets, such as brand name recognition. The accounting treatment of intangible assets is markedly different under IFRS and GAAP.
Generally, under GAAP, research and development costs are expensed (charged to an expense account) as they are incurred, since any future economic benefit arising from development of a given asset is uncertain. The costs of intangible assets acquired through R&D activities are expensed differently, depending on whether there is a future alternative use for the asset. If the asset has a future alternative use, it becomes a capitalized asset, meaning its cost will be depreciated over its useful life and the amortization costs are expensed. If the asset does not have a future alternative use, its cost is expensed upon acquisition.
International Accounting Standard 38 is the only accounting standard covering accounting procedures for research and development costs under IFRS. Research costs under IAS 38 are expensed during the accounting period in which they occur, and development costs require capitalization if certain criteria are met.
IAS 38 Criteria
A company must meet all the following criteria for development costs to be recognized as an intangible asset: It must be technically feasible to complete development of the intangible asset to make it available for use or sale; the company must demonstrate an intention to complete development of the asset and use or sell it; the company must have the ability to use or sell the asset; the company must show how the asset will generate future economic benefits, demonstrating existence of a market for the output of the asset or the asset itself or the usefulness of the asset, if it is to be for company use; the company must have sufficient financial, technical and other resources available for the completion of the asset for use or sale; and the company must demonstrate an ability to accurately measure expenditures that are attributable to the development of the asset.
Development costs under both IFRS and GAAP require the demonstration of probable future economic benefits and costs, which can be consistently measured, for recognition as intangible assets. However, start-up costs for a business are never capitalized as intangible assets under either accounting model. Advertising costs under GAAP are either expensed as incurred or when the advertising initially takes place and may be capitalized if certain criteria are met, whereas, under IFRS, advertising costs are always expensed as incurred.
Based in California, Debbie Donner is a freelance online writer who primarily writes articles related to personal finance. Donner received a Mensa scholarship in 2006 while attending California State University, Fresno. She holds a Bachelor of Arts degree in liberal arts and a multiple-subject teaching credential.