Associate Director for Quality and Technical Assurance, Stuart A. Brown discusses the definition of development costs and instances where development costs may be capitalised.
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:
FRS 102 prohibits the capitalisation of costs incurred during the research phase. Examples of research activities include:
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:
Some examples of development activities include:
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.