AS 8 - Accounting for Research & Development

Purpose: This statement deals with the treatment of cost of research and development in financial statements.

Definitions

• Research is original and planned investigation undertaken with the hope of gaining new scientific or technical knowledge and understanding.
• Development is the translation of research findings or other knowledge into a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services, prior to the commencement of commercial production.

Explanations

Research and development costs should be charged as an expense of the period in which they are incurred except where such costs may by deferred.

Research and development costs of a project may be deferred to future periods, if the following criteria are satisfied:

1. the product or process is clearly defined and the costs attributable to the product process can be separately identified,
2. the technical feasibility of the product or process has been demonstrated,
3. the management of the enterprise has indicated its intention to produce and market, or use, the product or process
4. there is a reasonable indication that current and future research and development costs to be incurred on the project together with expected production, selling and administration costs are likely to be more than covered by related future revenue/benefits, and
5. adequate resources exist, or are reasonably expected to be available to complete the project and market the produce or process.

These deferred costs should be reviewed at the end of each accounting period and when the above criterion is no longer applicable, the unamortised balance should be charged as an expense immediately.

The deferred costs should be allocated on a systematic basis to future accounting periods by reference either to the sale or use of the product or process or to the time period over which the product or process is expected to be sold or used.

Research and development costs once written off should not be reinstated even though the uncertainties that had led to their being written off no longer exist.

Disclosures

1. The total of research and development costs, including the amortised portion of deferred costs, charged as expense should be disclosed in the profit and loss Account for the period.
2. Deferred research and development expenditure should be separately disclosed in the Balance Sheet under the head "Miscellaneous Expenditure".