When pharma capitalises R&D

Drug development is the classic example of the gap between economic investment and accounting assets: billions are spent creating value that rarely appears on the balance sheet. Investors therefore look closely at R&D policies, and at the contrast with acquired pipeline assets, which are capitalised. This guide applies IAS 38's criteria to each stage of drug development, compares innovators with generics companies, and covers amortisation, impairment and US GAAP.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. 4 minute read.

Short answer

Pharma R&D is capitalised under IAS 38 only once development meets all six criteria, including technical feasibility and probable future economic benefits. For a new medicine, those are rarely demonstrable until the regulator approves it, or approval is virtually certain, because most candidates fail in clinical trials. So innovator companies expense almost all research and clinical development, including Phase III. Generics and biosimilar companies, whose products copy approved medicines, often reach the criteria earlier, for example once bioequivalence is shown and the filing is made. In this guide's example, an innovator expenses US$ 130 million of late-stage costs and capitalises nothing until approval, while a generics company capitalises 3 million of its 8 million spend.

At a glance

Research
Always expensed
Development
Capitalised only if six criteria met
Innovators
Usually from regulatory approval
Generics
Often from successful bioequivalence
After capitalising
Amortise from launch over exclusivity
US GAAP
ASC 730: R&D expensed
When pharma capitalises R&DResearch: Always expensed; Development: Capitalised only if six criteria met; Innovators: Usually from regulatory approval; Generics: Often from successful bioequivalence; After capitalising: Amortise from launch over exclusivity; US GAAP: ASC 730: R&D expensed.KEY FACTS AT A GLANCEWhen pharma capitalises R&DResearchAlways expensedDevelopmentCapitalised only if sixcriteria metInnovatorsUsually from regulatoryapprovalGenericsOften from successfulbioequivalenceAfter capitalisingAmortise from launch overexclusivityUS GAAPASC 730: R&D expensedTax BakersWhen pharma capitalises R&DResearch: Always expensed; Development: Capitalised only if six criteria met; Innovators: Usually from regulatory approval; Generics: Often from successful bioequivalence; After capitalising: Amortise from launch over exclusivity; US GAAP: ASC 730: R&D expensed.KEY FACTS AT A GLANCEWhen pharma capitalises R&DResearchAlways expensedDevelopmentCapitalised only if six criteria metInnovatorsUsually from regulatory approvalGenericsOften from successful bioequivalenceAfter capitalisingAmortise from launch over exclusivityUS GAAPASC 730: R&D expensedTax Bakers
Key facts at a glance, as set out in this guide.

What does IAS 38 require before capitalising?

Research costs are always expensed. Development costs are capitalised only from the point the company can demonstrate all of: the technical feasibility of completing the asset; its intention to complete it; its ability to use or sell it; how it will generate probable future economic benefits; the availability of adequate technical, financial and other resources to complete it; and its ability to measure the costs reliably. Costs expensed before that point are never reinstated. See IAS 38 research and development.

Why do innovators expense clinical development?

Each stage, preclinical, Phase I, II and III trials and regulatory review, can fail, and only a small share of candidates entering clinical trials is ever approved. Until the regulator approves the medicine, the company usually cannot demonstrate technical feasibility or probable future benefits. Most innovator companies therefore set the capitalisation point at regulatory approval, or at submission only where approval is considered virtually certain, and capitalise little or nothing, because most development spending happens before then.

Pharma R&D: an innovator and a generics company compared

An innovator spends US$ 120 million on Phase III trials and 10 million preparing its regulatory filing; approval arrives at the year end. After approval, it spends 6 million on development to meet the regulator's conditions for launch. A generics company spends 5 million developing a formulation and proving bioequivalence to an approved medicine, then 3 million on validation and its filing after the successful study.

Where capitalisation startsWhere capitalisation startsTOPICInnovatorGenerics companyResearch and preclinicalExpensedExpensedClinical or BE studiesExpensedExpensedRegulatory filingExpensedCapitalisedAfter approvalCapitalisedCapitalisedTypical startApprovalAfter BE success
Generics usually reach IAS 38's criteria earlier than innovators.
US$ millionExpensedCapitalisedWhy
Innovator: Phase III and filing130NoneApproval not yet obtained
Innovator: post-approval developmentNone6Criteria met after approval
Generic: formulation and bioequivalence5NoneOutcome uncertain until the study succeeds
Generic: validation and filingNone3Approval of a proven copy highly probable

The innovator's balance sheet shows only 6 million for a medicine that cost far more to develop; the rest has gone through profit. Some companies treat post-approval spending such as additional trials for new indications as research or development that is again uncertain, and expense it too, so the policy for each type of spending should be stated.

When do generics and biosimilar companies capitalise?

A generic medicine copies an approved molecule, so the main technical risks are formulation and showing bioequivalence. Many generics companies capitalise from a point such as a successful bioequivalence study or the filing of an abbreviated application, when they judge approval highly probable. Biosimilars, which copy complex biological medicines, carry more development risk and often reach the criteria later. Litigation over patents can also make future benefits uncertain even when approval is likely.

How does this compare with acquired R&D?

Separately acquired and business combination in-process R&D is capitalised, because the probability recognition criterion is treated as always met for those assets: the price reflects the expected chance of success. So a company that buys a Phase II candidate shows it as an asset, while the seller, or a company that developed the same candidate itself, shows nothing. Subsequent development spending on an acquired project is assessed under the same IAS 38 criteria as internal spending, so it is usually expensed. See pharma accounting.

How are capitalised development costs amortised?

From when the medicine is available for use, usually launch, over its expected useful life, typically limited by patent protection and regulatory exclusivity, and often on a straight-line basis. Before it is available for use, the asset is tested for impairment every year, and whenever there is an indication of impairment, such as a safety signal or a competitor's approval. See IAS 36 impairment.

How does US GAAP differ?

ASC 730 requires research and development costs to be expensed as incurred, with no development-stage capitalisation. In-process R&D acquired in an asset acquisition is also expensed unless it has an alternative future use, while IPR&D acquired in a business combination is capitalised. See IAS 38 vs ASC 730.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

When do pharma companies capitalise development costs under IFRS?

When all six IAS 38 criteria are met, which for a new medicine is usually at regulatory approval or when approval is virtually certain.

Are Phase III trial costs capitalised?

Usually not. Technical feasibility and probable benefits are rarely demonstrable before approval, so they are expensed.

Do generics companies capitalise earlier?

Often yes, from a point such as a successful bioequivalence study or filing, when approval of a proven copy is highly probable.

Can pharma companies capitalise development under US GAAP?

No. ASC 730 requires R&D to be expensed as incurred, except IPR&D acquired in a business combination.

Sources

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

  1. IFRS Foundation: IAS 38 Intangible Assets
  2. FASB Accounting Standards Codification: Topic 730, Research and Development

Rules and fees change. If you are reading this long after October 8, 2026, confirm the figures with the source before you rely on them.

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

More in Pharma

Next in this topicLicensing deals and milestone paymentsTopicAll 12 guides in Pharma

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