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Brown's Briefing - May

Stuart Brown | 18 May 2019

Associate Director for Quality and Technical Assurance, Stuart A. Brown discusses the definition of development costs and instances where development costs may be capitalised.

Development Costs


Some of the research and development costs incurred by a company may be eligible for capitalising on the balance sheet, rather than expensing.

This article covers the specific circumstance in which this capitalisation can occur.


The generation of internally generated intangible assets is split into two phases, research and development. If an entity cannot clearly distinguish between the two phases, then the entity will treat all of the expenditure on that project as having incurred in the research phase only.

An entity will recognise expenditure on the following items as an expense and shall not recognise as intangible assets:

  • Internally generated brands, logos, publishing titles, customer lists and items similar in substance.
  • Start-up activities (i.e. start-up costs), which include establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or business (i.e. pre-opening costs) and expenditure for starting new operations or launching new products or processes (i.e. pre-operating costs).
  • Training activities.
  • Advertising and promotional activities (unless it meets the definition of inventories held for distribution at no or nominal consideration.
  • Relocating or reorganising part or all of an entity.
  • Internally generated goodwill.

Research Phase

FRS 102 prohibits the capitalisation of costs incurred during the research phase. Examples of research activities include:

  • Activities aimed at obtaining new knowledge.
  • The search for, evaluation and final selection of, applications of research findings and other knowledge.
  • The search for alternatives for materials, devices, products, processes, systems or services.
  • The formulation, design, evaluation and final selection of possible alternatives for new or improved material, devices, projects, processes, systems or services.

Development Phase

FRS 102 offers a choice over whether costs meeting the criteria as development costs are capitalised or written-off as incurred.

An entity may recognise an intangible asset arising from development if it can demonstrate all of the following:

  • The technical feasibility of completing the intangible asset so that it will be available for use or sale.
  • Its intention to complete the intangible asset and use or sell it.
  • Its ability to use or sell the intangible asset.
  • How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
  • The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
  • Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Some examples of development activities include:

  • The design, construction and testing of pre-production or pre-use prototypes and models.
  • The design of tools, jigs, moulds and dies involving new technology.
  • The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production.
  • The design, construction and testing of a chosen alternative for new of improved materials, devices, products, processes, systems or services.

Where an entity adopts a policy of capitalising expenditure in the development phase that meets the conditions above, the policy shall be applied consistently to all expenditure that meets the requirements above.

To reiterate, expenditure that does not meet the set conditions will be expensed as incurred.


Capitalising development costs under FRS 102 is a choice. However, if the company chooses to capitalise costs then very specific rules must be satisfied.

If you need any further advice, please contact Duncan & Toplis on 0808 169 1196 to speak to one of our advisers.


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