IFRS Perspectives: Update on IFRS issues in the US
Companies often incur costs to develop products and services that they intend to use or sell. The accounting for these research and development costs under IFRS can be significantly more complex than under US GAAP
Under US GAAP, R&D costs within the scope of ASC 7301are expensed as incurred. US GAAP also has specific requirements for motion picture films, website development, cloud computing costs and software development costs.
Under IFRS (IAS 382), research costs are expensed, like US GAAP. However, unlike US GAAP, IFRS has broad-based guidance that requires companies to capitalize development expenditures, including internal costs, when certain criteria are met.
Based on these criteria, internally developed intangible assets (e.g. development expenses related to a prototype in the automotive industry) are generally capitalized and amortized under IFRS and expensed under US GAAP. This difference gives rise to two complexities in applying IFRS: distinguishing development activities from research activities, and analyzing whether and when the criteria for capitalizing development expenditures are met.
Separating development from research
The starting point for companies applying IFRS is to differentiate between costs that are related to ‘research’ activities versus those related to ‘development’ activities. While the definition of what constitutes ‘research’ versus ‘development’ is very similar between IFRS and US GAAP, neither provides a bright line on separating the two. Instead, a company needs to develop processes and controls that allow it to make that distinction based on the nature of different activities.
