14 July 2024
**AS 26 - Intangible Assets** provides guidance on accounting for and disclosing intangible assets, including those arising from research and development activities. Understanding the difference between research and development is crucial for correctly accounting for intangible assets under this standard.
### Research vs. Development:
1. **Research:** - **Definition:** Research is defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. It does not include the application of research findings or other knowledge to a plan or design for producing new or substantially improved materials, devices, products, processes, systems, or services. - **Characteristics:** Research is exploratory in nature and aims to discover new knowledge or principles without a specific application in mind. - **Example:** A pharmaceutical company conducts research to study the chemical properties of a certain compound to understand its potential therapeutic benefits. The outcome of this research may lead to new discoveries about the compound's interactions and effects.
2. **Development:** - **Definition:** Development is the application of research findings or other knowledge to a plan or design for producing new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use. - **Characteristics:** Development involves the translation of research findings into a tangible product, process, or service that can be used commercially. - **Example:** Building on the pharmaceutical research example, once the chemical properties of the compound are understood through research, the company engages in development activities to formulate the compound into a specific drug product, conduct preclinical and clinical trials, and obtain regulatory approvals for market launch.
### Practical Example:
Let’s consider a technology company that develops new software products:
- **Research Stage:** - **Activity:** Researchers in the company explore new algorithms and technologies to enhance data encryption methods for cybersecurity applications. - **Objective:** To gain a deeper understanding of encryption principles and discover potential new approaches.
- **Development Stage:** - **Activity:** Based on the research findings, the company’s development team designs and creates a new encryption software. - **Objective:** To apply the research findings into a tangible product that meets customer needs and regulatory requirements.
### Accounting Treatment under AS 26:
- **Research Costs:** Costs incurred in the research phase are expensed as incurred because the outcome of research activities cannot be reliably measured or controlled. These costs are typically recognized as expenses in the period in which they are incurred.
- **Development Costs:** Once the technological feasibility of a specific product or process is demonstrated (i.e., after the research phase), development costs that meet certain criteria (like probable future economic benefits and costs can be measured reliably) are capitalized as intangible assets.
### Conclusion:
Understanding the distinction between research and development is crucial for accounting under AS 26. Research involves the pursuit of new knowledge without a specific application, while development involves applying research findings to create new or improved products or processes. Properly differentiating these stages ensures accurate financial reporting of intangible assets in accordance with accounting standards.
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