Vehicle development costs

When do vehicle development costs meet IAS 38?

IAS 38 allows development costs to be capitalised only from the point the company can show the technical feasibility of completing the asset, its intention and ability to complete and use or sell it, how it will generate probable future economic benefits, adequate technical, financial and other resources, and reliable measurement of the costs. Carmakers manage programmes through gates: concept, design approval, series development, pre-series and start of production. Most conclude the criteria are met when the programme is approved for series development, when the design is fixed, the business case approved and funding committed. Earlier work on concepts and advanced engineering is research or does not yet meet the criteria. See IAS 38 research and development.

Vehicle development costs over a programme

A carmaker spends US$ 1,200 million developing a new model over four years before production starts. The programme passes its series development gate at the start of year -2.

The 850 million capitalised is amortised from the start of production over the expected model life of 7 years, 121.4 million a year, usually straight-line or in line with expected production volumes. Under US GAAP, all 1,200 million would have been expensed as incurred, reducing profit in the development years and leaving no amortisation later.

Which costs are capitalised?

Directly attributable costs of developing the vehicle once the criteria are met: engineering and design staff costs, including share-based payment, prototype vehicles and parts, testing and validation, homologation and certification, development of the vehicle's software, and engineering services bought from suppliers. General overheads, training and costs of selling are excluded. Tools and production equipment for the new model are property, plant and equipment, not development costs, and supplier tooling depends on who controls it; see supplier tooling. Software developed for the vehicle follows the same criteria; see capitalising software development.

How are capitalised development costs tested?

Until production starts, the asset is not yet available for use, so IAS 36 requires an impairment test every year, comparing the carrying amount with the expected cash flows of the model. After launch, the asset is tested when there are indicators, such as volumes well below plan, a shorter model life or new regulations. A cancelled programme is written off. Cuts to electric vehicle programmes have led to impairments of capitalised development costs and related tooling at a number of carmakers.

What about government grants for development?

Grants for developing low-emission vehicles or batteries are accounted for under IAS 20. A grant related to capitalised development costs is either deducted from the asset or presented as deferred income, and recognised in profit or loss over the asset's life as it is amortised. Grants for costs that are expensed are recognised as those costs are incurred. Conditions attached to grants, such as production or employment commitments, are assessed before recognising them.

How does US GAAP differ?

ASC 730 requires research and development costs to be expensed as incurred, with limited exceptions such as software to be sold once technological feasibility is reached and assets with alternative future uses. So US carmakers report higher research and development expense and no development asset, while IFRS carmakers show a large intangible asset and amortisation. Analysts often compare carmakers on total research and development spending, including the amount capitalised, and on the capitalisation ratio. See IAS 38 vs ASC 730 and automotive accounting.

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