IAS 38 vs ASC 730: research and development costs

IAS 38 vs ASC 730: what are the differences?

What are the IAS 38 capitalisation criteria?

Development expenditure is capitalised as an intangible asset when the company can demonstrate all six:

1. the technical feasibility of completing the asset so it will be available for use or sale;
2. its intention to complete it and use or sell it;
3. its ability to use or sell it;
4. how it will generate probable future economic benefits, such as a market for its output;
5. the availability of adequate technical, financial and other resources to complete it;
6. its ability to measure the expenditure reliably.

Costs incurred before the criteria are met are expensed and cannot be capitalised later. Once met, capitalisation is required, not optional.

An example: a development project

A company spends 500,000 developing a new product: 200,000 on research and early design, then 300,000 after it can show technical feasibility and all the other criteria.

Over the product's life the total expense is the same; IFRS spreads part of it through amortisation. If the product is a pharmaceutical awaiting regulatory approval, the feasibility criterion is often not met until approval, so in practice many drug companies expense most development costs even under IFRS.

What are the US GAAP software exceptions?

• Software to be sold, leased or marketed (ASC 985-20): costs are capitalised after technological feasibility is established until the product is available for release, which in practice is often a short window, so little is capitalised.
• Internal-use software (ASC 350-40): certain development costs are capitalised once specified criteria are met, including software used in cloud computing arrangements by the provider.

IFRS treats both under IAS 38's general criteria.

Which industries are most affected?

Car makers and engineering groups reporting under IFRS often capitalise large development programmes once a model or product is technically feasible, so their US peers report lower assets and lower profit in development years. Pharmaceutical and biotech companies are less affected, because regulatory approval usually comes late, keeping most costs in expense under both frameworks. Software companies sit in between, depending on how early feasibility is reached. Dual reporters track capitalised development costs separately so they can reverse them for US GAAP.

How is acquired research and development treated?

In a business combination, both frameworks recognise in-process research and development at fair value, alongside other identifiable intangible assets. In an asset acquisition, IFRS capitalises it, while US GAAP expenses it unless it has an alternative future use. See the key differences.

Where to go next

See IAS 16 vs US GAAP for tangible assets and every IFRS and IAS in one line.

This guide is general information. It is not tax or legal advice for your situation.