Which statement is true regarding research and development costs?

Which statement is true regarding research and development costs?

• A. A Research costs are capitalized
• B. B Development costs are always expensed
• C. C Research costs are expensed; development costs are capitalized only if the criteria are met
• D. D Both are expensed

Answer: (C)

R&D is split into two stages with different accounting treatments. Research costs are treated as expenses as incurred because they involve searching for new knowledge whose future benefits are uncertain and cannot be reliably measured as an asset. Development costs, on the other hand, can be recognized as an intangible asset if the entity can demonstrate technical feasibility to finish the project, intent and ability to complete it, the asset will generate probable future economic benefits, there is adequate resources to complete the project, and costs can be measured reliably. If those conditions aren’t met, development costs must be expensed. So the true statement is that research costs are expensed; development costs are capitalized only if the criteria are met. If the criteria aren’t met, development costs are expensed as well.

R&D is split into two stages with different accounting treatments. Research costs are treated as expenses as incurred because they involve searching for new knowledge whose future benefits are uncertain and cannot be reliably measured as an asset. Development costs, on the other hand, can be recognized as an intangible asset if the entity can demonstrate technical feasibility to finish the project, intent and ability to complete it, the asset will generate probable future economic benefits, there is adequate resources to complete the project, and costs can be measured reliably. If those conditions aren’t met, development costs must be expensed.

So the true statement is that research costs are expensed; development costs are capitalized only if the criteria are met. If the criteria aren’t met, development costs are expensed as well.