Product development costs

Manufacturers spend heavily on designing new products, and IFRS requires some of that spending to be capitalised once a project is clearly viable. Judging that point is the hard part. This guide works through a product development project from first concept to launch, explains the evidence that supports capitalisation, and covers prototypes, tooling, impairment and the very different US GAAP rule.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 3 minute read.

Short answer

Product development costs are capitalised under IAS 38 only from the point a manufacturer can show all six criteria are met, including technical feasibility, the intention and ability to complete and sell the product, probable future benefits, and reliable measurement. Research costs, and development costs incurred before that point, are expensed and cannot be reinstated later. Capitalised development is amortised from launch over the product's expected life. In this guide's example, of 2,000,000 spent on a new pump, 1,000,000 is capitalised and amortised at 250,000 a year.

At a glance

Standard
IAS 38 Intangible Assets
Research
Always expensed
Development
Capitalised once six criteria met
Before the criteria
Expensed, never reinstated
Amortisation
From launch over product life
US GAAP
ASC 730: mostly expensed
Product development costsStandard: IAS 38 Intangible Assets; Research: Always expensed; Development: Capitalised once six criteria met; Before the criteria: Expensed, never reinstated; Amortisation: From launch over product life; US GAAP: ASC 730: mostly expensed.KEY FACTS AT A GLANCEProduct development costsStandardIAS 38 Intangible AssetsResearchAlways expensedDevelopmentCapitalised once sixcriteria metBefore the criteriaExpensed, neverreinstatedAmortisationFrom launch over productlifeUS GAAPASC 730: mostly expensedTax BakersProduct development costsStandard: IAS 38 Intangible Assets; Research: Always expensed; Development: Capitalised once six criteria met; Before the criteria: Expensed, never reinstated; Amortisation: From launch over product life; US GAAP: ASC 730: mostly expensed.KEY FACTS AT A GLANCEProduct development costsStandardIAS 38 Intangible AssetsResearchAlways expensedDevelopmentCapitalised once six criteria metBefore the criteriaExpensed, never reinstatedAmortisationFrom launch over product lifeUS GAAPASC 730: mostly expensedTax Bakers
Key facts at a glance, as set out in this guide.

Product development costs: an example project

A manufacturer develops a new industrial pump. In year 1 it spends 400,000 on concept work and materials testing, the research phase. It then spends 600,000 on detailed design and a first prototype. On 1 September of year 2, the prototype passes performance testing, the board approves the business case and funding, and all six criteria are met. It spends a further 1,000,000 on final design, certification testing and pre-production prototypes. The pump launches on 1 January of year 3 with an expected market life of 4 years.

Where the project's spending goesWhere the project's spending goes2,000,000Total spent-400,000Researchexpensed-600,000Early developmentexpensed1,000,000Capitalised
Only spending after the criteria are met becomes an asset.
PhaseCostTreatment
Research: concept and materials testing400,000Expensed
Development before criteria were met600,000Expensed
Development after 1 September, year 21,000,000Capitalised
Amortisation from 1 January, year 3250,000 a yearOver 4 years

What are the six criteria?

  1. Technical feasibility of completing the product.
  2. The intention to complete it and use or sell it.
  3. The ability to use or sell it.
  4. How it will generate probable future economic benefits, such as evidence of a market.
  5. Adequate technical, financial and other resources to complete it.
  6. The ability to measure the costs reliably.

In manufacturing, the evidence usually comes from a stage-gate process: a successful prototype or test, a formal approval of the business case with a budget, and market or customer evidence. Capitalisation starts at the gate where all six are met, not when the project began.

Which costs can be capitalised?

In the development phase, only directly attributable costs: engineers' time on the project, materials and services used, testing and certification fees, and amortisation of patents used. Not general overheads, training, or inefficiencies such as redesign after a mistake. Tooling and moulds made for producing the new product are property, plant and equipment rather than part of the intangible asset; see customer-funded tooling.

How are prototypes and pilot plants treated?

Prototypes and pre-production models are development costs, capitalised or expensed according to whether the criteria are met when they are made. A pilot plant that is not of a scale economically feasible for commercial production is part of development too. If the pilot plant will later be used for commercial production, it is property, plant and equipment.

What evidence do auditors look for?

Minutes or approvals showing the date each criterion was met, test results for technical feasibility, the approved budget and business case, and timesheets that tie engineers' hours to the project. Capitalising from a date with no documented evidence is a common audit finding.

When is capitalised development tested for impairment?

Every year while the project is not yet available for use, whether or not there is any indicator, because IAS 36 requires an annual test for intangible assets not yet in use. After launch, it is tested when there are indicators, such as weak sales or a competitor's better product. A project abandoned before launch is written off.

What about development paid for by customers?

When a customer pays for development of a product it will buy, the manufacturer first assesses under IFRS 15 whether the development work is a separate performance obligation. If it is, the payment is revenue for that service; if not, development costs may be costs to fulfil the contract.

How does US GAAP differ?

ASC 730 requires research and development costs to be expensed as incurred, apart from specific exceptions such as software, so a US manufacturer would expense the whole 2,000,000. Comparing IFRS and US manufacturers' profits and assets needs an adjustment for this. Research tax credits are covered in government grants. See IAS 38 research and development, IAS 38 vs ASC 730 and manufacturing accounting.

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Questions people ask

When are product development costs capitalised under IAS 38?

From the point all six criteria are met, including technical feasibility, intention and ability to complete and sell, probable future benefits, adequate resources and reliable measurement.

Can expensed development costs be capitalised later?

No. Costs expensed before the criteria were met cannot be reinstated as an asset.

When does amortisation of development costs start?

When the product is available for use, typically at launch, over its expected life.

How does US GAAP treat development costs?

ASC 730 generally requires research and development costs to be expensed as incurred.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 38 Intangible Assets

Rules and fees change. If you are reading this long after October 6, 2026, confirm the figures with the source before you rely on them.

IAS 38Research and development costs under IAS 38IFRS vs US GAAPIAS 38 vs ASC 730: research and development costsManufacturingManufacturing accounting: the key IFRS issues

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