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 amortisation 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 amortisation of patents and licences.
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 amortised 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 amortised.
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.
6.1 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 amortisation practices is also disclosed when research and development costs are deferred.
6.2 The disclosure of
(i) research and development costs, including the amortisation of deferred costs, charged as an expense of each period, and
(ii) the unamortised 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.