Research expenditure

Learning objectives

• Identify the treatment of research expenditure (expense).L1
• Recognise research expenditure as an expense.L1, L2

Normative references

• IAS 38 §54No intangible asset arising from research is recognised; research expenditure is recognised as an expense when it is incurred.
• 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.

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

25 questions

• True or false? Research expenditure may be capitalised once it is probable that the project will lead to a new product.L1
• A biotech start-up carries out work to understand how a molecule acts, with no defined product project. This month, it owes {research_salaries} in salaries to its team of researchers and pays {lab_supplies} in cash for laboratory supplies. Record the entry for the month.L1
• The Orvino group is listing its expenditure for the year. Which items can be recognised as intangible assets?L3
• Two research projects on composite materials are at the same stage. The first has been run internally by Arvelle from the outset; the second is taken over by Arvelle when it acquires Duna in a business combination, and it meets the definition of an intangible asset. Which comparison is correct in Arvelle's consolidated financial statements?L4
• 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
• 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
• True or false? The year's research expenditure may be accumulated in an asset account, then expensed at the end of the project if it fails.L1
• Before the year's financial statements are finalised, you note that the Fenwick laboratory has capitalised, as an asset under construction, 180,000 of expenditure incurred during the research phase of a vaccine project, on the grounds that management considers the development of a product probable. What correction do you propose?L2
• True or false? When a project moves from the research phase to the development phase, research expenditure expensed in previous years may be reinstated in the cost of the intangible asset.L2
• How does an entity account for expenditure incurred during the research phase of an internal project?L1
• In 20X1, Galdor incurs 250,000 of expenditure on an internal project that is still in its research phase. Its business plan nevertheless forecasts a highly profitable product. What amount is recognised as an intangible asset for this project at the end of 20X1?L2
• As part of the research phase of an internal project, Orvane is studying new lightweight alloys. This quarter, it receives an invoice from a university laboratory for {external_tests} of tests, not yet paid, and pays {researcher_fees} in cash in fees to independent researchers. Record the entry for the quarter.L1
• The software publisher Brisane is exploring several algorithmic avenues for a future translation tool; the project is in its research phase, but management considers it very promising and wishes to capitalise its cost. For the month, the remuneration owed to the team amounts to {staff_costs} and the subscription to a simulation service, paid in cash, to {simulation_subscription}. Record the entry for the month.L2
• 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
• In 20X1, Ramee incurs 90,000 of research expenditure, 60,000 of development expenditure before the date on which the recognition criteria are first met, and 40,000 of development expenditure after that date. What amount of research and development expenditure recognised as an expense must it disclose in its notes for 20X1?L2
• During the year, Ombrevalle incurred {research_costs} of research expenditure on new materials, {development_before_criteria} of development expenditure on a sensor before all the capitalisation criteria were demonstrated, then {development_capitalised} of development expenditure capitalised once the criteria were met. It also incurred {launch_advertising} of advertising for the sensor launch. What amount of research and development expenditure recognised as an expense must it disclose?L2
• In 20X2, the video game publisher Kalmira carried out an exploratory study of graphics engines for {research_costs}. It then developed a new game: {development_before_criteria} was incurred from January to April, before all the criteria were demonstrated on 1 May, and {development_capitalised} was capitalised from May to December. Finally, training the support teams for the new game cost {staff_training}. What amount of research and development expenditure recognised as an expense in 20X2 must be disclosed?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
• Glendor capitalises all its development expenditure, which meets the criteria from the start of the projects, and expenses its research expenditure. Its finance director believes no disclosure of R&D expensed is necessary. Is he right?L2