BAR, Business Analysis and Reporting
Sources for Research and Development Costs
Last reviewed
The standards and authorities behind PocketCPA's BAR lessons on Research and Development Costs. The topic rests on ASC 730.
About this topic
Two companies buy the identical machine for 500,000 on the same day and put it to work on a research program. One charges the whole 500,000 to research and development expense in Year 1, and the other charges 100,000 and carries 400,000 as an asset. Nothing about the machine differs. What differs is whether it can do anything at all once that project ends, and that one question decides more answers here than any rule about research does.
ASC 730 charges research and development costs to expense as incurred, because the future benefit of the work is too uncertain to capitalize. The rule admits no probability gate, so a program abandoned in year two and a program that becomes the entity's best-selling product produce identical accounting. Very little on the exam turns on that rule. What the exam turns on is which dollars are research and development in the first place, and that answer comes from sorting rather than from arithmetic.
Key points
- Research costs are expensed as incurred; development costs under U.S. GAAP are also expensed.
- R&D costs include salaries, materials, contract research, and depreciation on R&D equipment.
- Software development costs for sale are capitalized after technological feasibility is established.
- Costs of tangible assets with alternative future uses are capitalized and depreciated, not expensed as R&D.
What the lessons cover
- The baseline: expense as incurred
- Materials, equipment, and facilities
- Acquired in-process research and development
- Adjacent rules to keep straight
- Building the research and development expense population
- Research and development funded by another party (ASC 730-20)
- US GAAP against IFRS: the IAS 38 divergence
- A full schedule, worked end to end
- The decision sequence, and the trap at each fork
Authoritative references
- ASC 730-10-25-1, research and development costs expensed as incurred.
- ASC 730-10-25-2, the cost elements: materials, equipment, and facilities with no alternative future use are expensed when acquired, as at 25-2(a).
- ASC 730-10-15-4, the scope exclusions, including research and development assets acquired in a business combination at 15-4(f).
- ASC 730-10-25-2 and 25-4, and 730-10-60-2A, amended or superseded by ASU 2025-06, with a link to transition paragraph ASC 350-40-65-4.
- ASC 730-10-60-5, a funded software-development arrangement directed to ASC 730-20-15-1A and ASC 985-20-25-12.
- ASC 730-20, research and development funded by another party.
- ASC 985-20-25-2, software to be sold: costs before technological feasibility are expensed and costs after it are capitalized.
- ASC 350-40, internal-use software, and ASC 985-20, software to be sold, leased, or licensed, as the places a cost can escape ASC 730-10-25-1.
- ASC 720-15, start-up and organization costs.
- ASC 805 and ASC 350-30-35-17A, in-process research and development acquired in a business combination, recognized separately from goodwill at acquisition-date fair value, and carried as an indefinite-lived intangible until completion or abandonment.
How PocketCPA uses these sources
Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.