Research phase and development phase

Learning objectives

• Distinguish the research phase from the development phase of an internal project.L1, L2
• Justify the classification of the expenditure of a project whose phases are difficult to separate.L3

Normative references

• IAS 38 §52To assess whether an internally generated asset meets the criteria for recognition, the entity classifies its generation into a research phase and a development phase (terms with a broader meaning than the definitions).
• IAS 38 §53If the entity cannot distinguish the two phases of an internal project, it treats all the expenditure on that project as if it were incurred in the research phase only.
• IAS 38 §56Examples of research activities: (a) activities aimed at obtaining new knowledge; (b) the search for, evaluation and final selection of applications of research findings or other knowledge; (c) the search for alternatives for materials, devices, products, processes, systems or services; (d) the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.
• IAS 38 §59Examples of development activities: (a) the design, construction and testing of pre-production or pre-use prototypes and models; (b) the design of tools, jigs, moulds and dies involving new technology; (c) the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; (d) the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

18 questions

• True or false? To assess whether an internally generated intangible asset can be recognised, the entity classifies the generation of the asset into a research phase and a development phase.L1
• True or false? When an entity cannot distinguish the research phase from the development phase of an internal project, it treats all the expenditure on that project as incurred in the research phase.L1
• True or false? When the phases of an internal project cannot be separated, the entity allocates the expenditure between research and development in proportion to the time elapsed since the project began.L1
• True or false? For the purpose of the rules on internally generated intangible assets, the terms research phase and development phase have a broader meaning than the definitions of research and development.L2
• An entity is carrying out an internal project that may result in an intangible asset. What approach does IAS 38 require in order to assess whether the asset can be recognised?L1
• Ardel has spent 300,000 on an internal project for a new composite material, without being able to distinguish, in its tracking, the work relating to research from that relating to development. How should these 300,000 be treated?L2
• Which of the following statements about the phases of an internal project are correct?L2
• The Cylvie laboratory has for two years been running an internal project whose exploratory and applied work is so intertwined that it cannot distinguish the two phases. Which of the following consequences are correct?L3
• The software publisher Quorlis is developing a recommendation engine using an iterative method: each work cycle mixes exploratory work and applied programming, and the time spent is not split between the two. The year's expenditure amounts to 420,000. The finance director proposes capitalising 40% of this amount, the portion he estimates relates to development. What do you recommend?L2
• In 20X1, Melvane could not distinguish the phases of its project for a new industrial adhesive and recognised 250,000 as an expense. In early 20X2, it sets up tracking that clearly separates the two phases; on 1 March 20X2, it demonstrates for the first time all the recognition criteria of the development phase. The technical director asks for the 250,000 of 20X1 to be reclassified as an asset. Which answer is correct?L3
• Pyrene runs two internal projects. For project Alpha, a formal review documents the move from the research phase to the development phase. For project Beta, the work is so intertwined that no separation is possible. Which analysis is correct?L3
• Ivrel is designing a new recycling process. Within the same teams and with no separate tracking, the engineers alternate between tests aimed at understanding the chemical reactions and fine-tuning the industrial pilot. The management controller proposes capitalising the expenditure incurred after the first successful test, which he estimates at 55% of the year's total. Write a memo justifying the classification of the year's expenditure.L3
• Breval cannot distinguish the research phase from the development phase of its internal project for a self-cleaning paint. The month's expenditure, paid in cash, amounts to {project_costs}. The project manager estimates, without detailed tracking, that {estimated_development_share} of this amount relates to development. Record the entry for the month.L2
• The Talmont group is designing a connected agricultural sensor; its engineers carry out, in parallel and without separating them, the study of the physical phenomena and the fine-tuning of the housing. This quarter, a design office invoices it {design_office_fees}, not yet paid, and the salaries owed to the engineers reach {engineer_salaries}. Management wants to record these amounts as an asset. Record the entry for the quarter.L2
• Tarvelle carried out three internal projects. For project A, it could not distinguish the research phase from the development phase; expenditure amounts to {undistinguished_project}. Project B, a basic research project, cost {research_costs}. Project C has met all the development criteria since the start of the year; its expenditure of {development_capitalised} was capitalised. What amount of R&D recognised as an expense must be disclosed?L2
• The technical centre of the Brunelles farming cooperative spent {research_costs} testing yeast strains in the laboratory. Its harvest traceability tool, which meets the capitalisation criteria, gave rise to {development_capitalised} of capitalised expenditure. A connected irrigation project cost {undistinguished_project}, and the cooperative cannot separate what relates to research from what relates to development. What total of R&D expensed does the cooperative mention in its notes?L2
• Voltanis, a battery manufacturer, lists the work carried out by its engineering department during the year. Which items are examples of development activities?L2
• Granovia designs, builds and operates a small pilot plant producing a new fertiliser. Its size does not allow profitable commercial production: it is used to validate the process before any investment in a factory. To which phase does this activity belong?L1