R&D Cost in Accounts

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Srinivas (Querist)
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22 May 2010 Hi All,

Pls Clarify me regarding the following..

How to treat R&D cost in the books of accounts?

when it will be deffered ?
when it will be revenue?

if it is deffered howmany years we consider in pharma companies?

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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22 May 2010 In Cost accounting. It will be deffered and amartised based on the total units produced by the R&D cost

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Srinivas

Srinivas (Querist)
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26 May 2010 Iam not satisfied with your answer.

can anybody clarify me?????

Pls help me........

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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22 July 2025 The treatment of R&D costs in the books of accounts can vary depending on the nature of the expenses and the accounting standards followed. Here's a detailed breakdown of how Research and Development (R&D) costs are treated, specifically in pharma companies:

1. When R&D Costs are Treated as Revenue (Expense):
Revenue expenditure: R&D costs are generally treated as revenue expenditure in the year in which they are incurred unless the project meets specific criteria to be capitalized.

This means the costs related to research (e.g., basic studies or exploratory research) and development (e.g., creating new products or processes) are charged to the Income Statement immediately as expenses.

This treatment is typically followed when the outcome of the R&D is uncertain and there is no clear pathway to future economic benefit.

2. When R&D Costs are Deferred (Capitalized):
Under certain conditions, R&D costs can be capitalized or deferred (i.e., treated as an asset). This is typically done for development costs that lead to a future economic benefit. In this case, the costs are capitalized as an intangible asset (such as a patent or technology).

Criteria for Deferring/Capitalizing R&D Costs:

The project must have feasibility, meaning it is likely to generate future economic benefits.

The company must be able to demonstrate that the intangible asset will generate future revenue or cost savings.

The project should have a clear path to completion, with identifiable milestones and measurable outcomes.

Costs should be directly attributable to the development project.

For example, in pharma companies, if a pharmaceutical drug is being developed and it is expected to be commercialized in the future, the development costs (like clinical trial costs, testing, etc.) can be capitalized, while research costs (like exploratory studies) are typically expensed.

3. Amortization of Deferred R&D Costs:
When R&D costs are deferred and capitalized, they are not immediately written off. Instead, they are amortized over a period of time. The amortization period will depend on the expected useful life of the intangible asset (e.g., patent life or product life cycle).

In pharma companies, the amortization period for deferred R&D costs could typically be based on the patent life of the product or the period during which the company expects to generate revenue from the developed product.

Generally, the amortization period is considered to be between 3 to 5 years, depending on the project and the expected life of the product.

Note: The amortization period should be aligned with the expected benefits from the developed product.

4. Accounting under Different Standards:
Indian Accounting Standards (Ind AS) and IFRS:

Under Ind AS 38 (Intangible Assets), research costs are expensed immediately, whereas development costs are capitalized if they meet the criteria for recognition as an intangible asset.

For pharma companies, development costs related to creating new drugs or treatments can be capitalized, while research costs are generally expensed in the year incurred.

GAAP (Generally Accepted Accounting Principles): Under US GAAP, R&D costs are typically expensed as incurred, unless they are related to the development of certain intangible assets that meet the criteria for capitalization.

5. Pharma-Specific Considerations:
Clinical Trials and Testing: The costs associated with clinical trials and testing for new drugs or treatments are usually capitalized under development costs if it is clear that the product will generate future benefits.

Patent Costs: The costs associated with securing patents (e.g., filing fees) related to the developed product can also be capitalized and amortized over the life of the patent.

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