Statements
of Accounting Standards (AS8)
Accounting for Research
and Development
The following is the
text of the Accounting Standard
(AS) 8 issued by the Council
of the Institute of Chartered
Accountants of India on 'Accounting
for Research and Development'.
The Standard deals with the
treatment of costs of research
and development in financial
statements.
In the initial years,
this accounting standard will
be recommendatory in character.
During this period, this standard
is recommended for use by companies
listed on a recognized stock
exchange and other large commercial,
industrial and business enterprises
in the public and private sectors.
Introduction
I. This Statement
deals with the treatment of
costs of research and development
in financial statements.
2. The Statement does
not deal with the accounting
implications of the following
specialized activities:
(i) research and
development activities conducted
for others under a contract;
(ii) exploration
for oil, gas and mineral deposits;
(iii) research
and development activities of
enterprises at the construction
stage.
Definitions
3. The following terms
are used in this Statement with
the meanings specified:
(i) Research
is original and planned
investigation undertaken with
the hope of gaining new scientific
or technical knowledge and understanding;
(ii) Development
is the translation of research
findings or other knowledge
into a plan or design for the
production of new or substantially
improved materials, devices,
products, processes, systems
or services prior to the commencement
of commercial production.
Explanation
4.
Cost of Research and Development
4.1 There can be practical
difficulties in deciding the
amounts of the costs specifically
attributable to research and
development. In order to achieve
a reasonable degree of comparability
between enterprises and between
accounting periods of the same
enterprise, it is necessary
to identify the elements comprising
research and development costs.
4.2 Costs incurred
for research and development
include the following:
(i) salaries,
wages and other related costs
of personnel;
(ii) costs of
materials and services consumed;
(iii) depreciation
of building, equipment and facilities
which have alternative economic
use, to the extent that they
are used for research and development;
(iv) an appropriate
amortization of the cost of
building, equipment and facilities
which have no alternative economic
use, to the extent that they
are used for research and development;
(v) a reasonable
allocation of overhead costs;
(vi) payment to
outside bodies for research
and development projects related
to the enterprise; and
(vii) other costs,
such as the amortization of
patents and licenses.
4.3 Costs incurred
to maintain production or to
promote sales of existing products
are excluded from the costs
of research and development.
Thus, the costs of routine or
periodic minor modifications
to existing products, production
lines, manufacturing processes
and other ongoing operations
as well as routine or promotional
costs of market research are
excluded.
5.
Accounting Treatment of Research
and Development Costs
5.1 The allocation
of the costs of research and
development activities to accounting
periods is determined by their
relationship to the expected
future benefits to be derived
from these activities. In most
cases there is little, if any,
direct relationship between
the amount of current research
and development costs and future
benefits because the amount
of such benefits, and the periods
over which they will be received,
are usually too uncertain. Research
and development costs are therefore
usually charged to expense in
the period in which they are
incurred.
5.2 If it can be demonstrated,
however, that the product or
process is technically and commercially
feasible and that the enterprise
has adequate resources to enable
the product or process to be
marketed, it may be appropriate
to defer the costs of related
research and development to
future periods. Research and
development costs previously
written off are not reinstated
because they were incurred at
a time when the technical and
commercial feasibility of the
project was too uncertain to
establish a relationship with
future benefits and they were
therefore proper charges to
those past periods.
5.3 Deferred research
and development costs are amortized
on a systematic basis, either
by reference to the sale or
use of the product or process
or by reference to a reasonable
time period. However, technological
and economic obsolescence create
uncertainties that restrict
the number of units and time
period over which deferred costs
are to be amortized.
5.4 Wherever research
and development costs are to
be deferred, the appropriate
legal requirements are also
taken into account, for example,
in the case of companies the
need to provide depreciation
on fixed assets used for purposes
of research and development
in accordance with the provisions
of Sections 205 and 350 of the
Companies Act.
6.
Disclosure
6.1 The accounting
policy adopted for the costs
of research and development
is included in the statement
of accounting policies (see
AS 1 on 'Disclosure of Accounting
Policies'). Information about
amortization practices is also
disclosed when research and
development costs are deferred.
6.2 The disclosure
of
(i) research and
development costs, including
the amortization of deferred
costs, charged as an expense
of each period, and
(ii) the unmerited
balance, if any, of deferred
research and development costs,
enables the users
of financial statements to consider
the significance of such activities
in relation to those of other
enterprises as well as to the
other activities of the enterprise
itself.
Accounting Standard
(The Accounting
Standard comprises paragraphs
7–16 of this Statement.
The Standard should be read
in the context of paragraphs
1–6 of this Statement and
of the 'Preface to the Statements
of Accounting Standards'.)
7. Research and development
costs should include:
(i) salaries,
wages and other related costs
of personnel engaged in research
and development;
(ii) costs of
materials and services consumed
in research and development;
(iii) depreciation
of building, equipment and facilities
which have alternative economic
use, to the extent that they
are used for research and development;
(iv) an appropriate
amortization of the cost of
building, equipment and facilities
which have no alternative economic
use, to the extent that they
are used for research and development;
(v) overhead costs
related to research and development;
(vi) payment to
outside bodies for research
and development projects related
to the enterprise; and
(vii) other costs
related to research and development
such as amortization of patents
and licenses.
8. Amount of research
and development cost described
in paragraph 7 should be charged
as an expense of the period
in which they are incurred except
where such costs may be deferred
in accordance with paragraph
9.
9. Research and development
costs of a project may be deferred
to future periods, if the following
criteria are satisfied:
(i) the product
or process is clearly defined
and the costs attributable to
the product or process can be
separately identified;
(ii) the technical
feasibility of the product or
process has been demonstrated;
(iii) the management
of the enterprise has indicated
its intention to produce and
market, or use, the product
or process;
(iv) there is
a reasonable indication that
current and future research
and development costs to be
incurred on the project together
with expected production, selling
and administration costs are
likely to be more than covered
by related future revenues/benefits;
and
(v) adequate resources
exist, or are reasonably expected
to be available, to complete
the project and market the product
or process.
10. Wherever research
and development costs are deferred,
the appropriate legal requirements
should also be taken into account.
11. If an accounting
policy of deferral of research
and development costs is adopted,
it should be applied to all
such projects that meet the
criteria in paragraph 9.
12. If research and
development costs of a project
are deferred, they should be
allocated on a systematic basis
to future accounting periods
by reference either to the sale
or use of the product or process
or to the time period over which
the product or process is expected
to be sold or used.
13. The deferred research
and development costs of a project
should be reviewed at the end
of each accounting period. When
the criteria of paragraph 9,
which previously justified the
deferral of the costs, no longer
apply, the unmerited balance
should be charged as an expense
immediately. When the criteria
for deferral continue to be
met but the amount of unmerited
balance of the deferred research
and development costs and other
relevant costs exceed the expected
future revenues/benefits related
thereto, such expenses should
be charged as an expense immediately.
14. Research and development
costs once written off should
not be reinstated even though
the uncertainties which had
led to their being written off
no longer exist.
Disclosure
I5. The total of research
and development costs, including
the amortized portion of deferred
costs, charged as expense should
be disclosed in the profit and
loss account for the period.
16. Deferred research
and development expenditure
should be separately disclosed
in the balance sheet under the
head 'Miscellaneous Expenditure'. |
