Research and development (R&D) plays a crucial role in the advancement of products and services across various industries. However, accounting for R&D costs requires careful consideration and adherence to specific standards. This article delves into the accounting treatment of R&D costs under both UK and International Accounting Standards, highlighting the different viewpoints taken by each framework.

The Importance of R&D Expenditure:

Businesses invest significant amounts of money in R&D activities with the goal of developing innovative products and services that can generate substantial future income. Recognizing the economic benefits associated with these costs is essential for accurate financial reporting and decision-making.

Accounting Predicament:

Determining the appropriate accounting treatment for R&D costs presents a challenge. While some argue that R&D costs should be treated as assets due to their potential future economic benefits, others contend that predicting such benefits accurately is uncertain. To address this issue, both UK and International Accounting Standards provide guidance to accountants for a clearer understanding.

Intangible Assets:

Intangible assets, unlike tangible assets, have no physical form. There are two types of intangible assets: purchased and internally-generated. The accounting treatment for purchased intangibles is relatively straightforward, but handling internally-generated assets, including R&D costs, requires careful consideration.

R&D Definitions:

Research involves planned investigation aimed at acquiring new scientific or technical knowledge. It is conducted without any immediate expectation of future economic benefit. On the other hand, development applies research findings to create or improve materials, products, processes, or services before commercial production. Development activities involve a more tangible application of research.

UK Treatment of R&D:

Under UK accounting standards, R&D costs fall into the category of intangible assets. The accounting treatment for R&D follows the rules specified in SSAP 13, Accounting for Research and Development. According to SSAP 13, research costs are expensed as incurred, as they do not directly lead to future economic benefits. Development costs, however, can be capitalized if specific criteria are met, including a clearly defined project, separate identifiability of expenditure, commercial viability, technical feasibility, expected project income outweighing costs, and availability of necessary resources.

Treatment of Capitalized Development Costs:

When development costs meet the criteria for capitalization, they are recognized as assets and should be amortized over the expected periods of benefit. Amortization begins when commercial production commences or when the developed product or service is put to use. Regular reviews of capitalized projects are essential to ensure that the recognition criteria are still met. If conditions change or become uncertain, the capitalized costs must be written off immediately.

Problems with UK SSAP 13:

SSAP 13 differs from the International Accounting Standard (IAS) in this area, allowing a choice over capitalization. This flexibility can lead to inconsistencies between companies, and the subjective nature of some criteria can potentially be manipulated by companies wishing to capitalize development costs.

International Treatment of R&D:

IAS 38, Intangible Assets, covers the accounting treatment of R&D costs under International Accounting Standards. It distinguishes the research and development phases, providing a clearer framework for recognizing internally-generated intangible assets. At the research stage, all expenditure is expensed as incurred since the economic benefit is uncertain. In the development phase, capitalization occurs when specific criteria, such as technical feasibility, intention to complete, and availability of resources, are met.

Treatment of Capitalized Development Costs:

Once development costs are capitalized, they should be amortized over the asset’s finite life, aligning with the accruals concept. Amortization commences when commercial production begins, ensuring proper matching of income and expenditure. Regular reviews are necessary to assess the continued fulfillment of recognition criteria. If the criteria are no longer met, the previously capitalized costs must be expensed immediately.


The accounting treatment of R&D costs under both UK and International Accounting Standards acknowledges the importance of recognizing these expenses in financial reporting. While UK standards provide specific guidance through SSAP 13, International standards address R&D costs under IAS 38. Understanding the criteria for capitalization and the subsequent amortization of development costs is crucial for accurate financial statements. Adhering to the appropriate accounting standards ensures transparency and consistency in reporting R&D expenditure.

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