Financial Accounting · Intangible non-current assets and amortisation

Research and Development Costs under IAS 38

Updated 11 October 2026 · Fact-checked

Under IAS 38, research expenditure is always expensed to profit or loss when incurred. Development expenditure is capitalised as an intangible asset only once all the recognition criteria are proven. Before that point it is expensed. Once capitalised, the asset is amortised over its useful life from the date of commercial production.

Understand Research and Development Expenditure

Companies spend money on new ideas. Some of that spend may lead to future income. Some may lead nowhere. IAS 38 Intangible Assets sets out when this spend can be shown as an asset in the statement of financial position and when it must be charged as an expense.

Research is original, planned investigation to gain new scientific or technical knowledge. At this stage nobody can show that future income will result. So research costs are always expensed to profit or loss when incurred. They can never be capitalised.

Development is applying research findings to a plan or design for new or improved products or processes before commercial production begins. By this stage the project is more certain. So IAS 38 allows development costs to be capitalised, but only if the entity can demonstrate all the criteria. If even one is missing, the cost is expensed.

The criteria are often remembered as PIRATE: Probable future economic benefits, Intention to complete and use or sell, Resources available to complete, Ability to use or sell the asset, Technical feasibility, and Expenditure can be measured reliably. Only costs incurred after all criteria are met are capitalised. Costs already expensed earlier are not reinstated later.

Once the product goes into commercial production, the capitalised amount is amortised over its useful life, usually straight-line, and the charge goes to profit or loss. Capitalised development costs are shown under intangible non-current assets at cost less accumulated amortisation and impairment.

Key formulas to remember

Research expenditure: Research costs → expense in profit or loss when incurred; No exceptions. Never capitalise research.
Development expenditure: Development costs → capitalise only if ALL criteria are met; otherwise expense; Capitalise only costs incurred from the date the criteria are first met.
Recognition criteria (PIRATE): Probable benefits, Intention, Resources, Ability to use or sell, Technical feasibility, Expenditure measurable; All six must be demonstrated. One failure means expense.
Amortisation: Annual amortisation = Capitalised cost ÷ Useful life (straight-line); Start when commercial production begins, not when the project starts. Prorate for part years.
Carrying amount: Carrying amount = Cost − Accumulated amortisation − Impairment; This is the figure shown in the statement of financial position.
Internally generated brands and similar items: Internally generated brands, mastheads, customer lists → not recognised; They cannot be distinguished from the cost of developing the business as a whole.

How to solve Research and Development Expenditure questions

Use this method for any question on research and development costs.

1Read the scenario and list each cost with its date and project stage.
2Label each cost as research or development. Costs of investigating and exploring are research. Costs of designing and testing a specific product or process are development.
3Expense all research costs in profit or loss.
4For development costs, find the date when all the PIRATE criteria were first met. Expense development costs before that date.
5Capitalise development costs incurred from that date onward as an intangible asset.
6If commercial production has started, calculate amortisation: cost ÷ useful life, adjusted for the months in the year.
7Calculate the carrying amount and the total charge to profit or loss (expensed costs plus amortisation), then answer exactly what was asked.

Quickest way: Date split method

When to use it: Use for number entry or multiple choice questions that give costs by period and a date when the criteria were met.

Draw a quick line of dates and mark the date the criteria were met.
Everything before that date, plus all research, is expensed.
Everything after that date is capitalised.
Amortise only if production has started, and check the months.
Check the question asks for the expense, the asset or the carrying amount.

Common mistakes in Research and Development Expenditure

Capitalising research costs because the project later succeeded.
Students judge with hindsight.
Fix: Research is always expensed. Success later does not change this.
Capitalising all development costs, including those before the criteria were met.
Students see the word development and assume capitalise.
Fix: Capitalise only costs from the date all criteria are met. Earlier costs stay expensed.
Starting amortisation when the project starts.
Students copy the depreciation habit of starting at purchase.
Fix: Amortise from the start of commercial production, over the useful life.
Forgetting to include expensed costs in the profit or loss total.
Students focus on the asset and amortisation only.
Fix: Total charge = research and non-qualifying development expensed + amortisation.
Treating capitalisation as a free choice.
Students confuse it with older rules or other standards.
Fix: Under IAS 38 capitalisation is required once all criteria are met, not optional.
Reinstating earlier expensed development costs as an asset.
Students want the full project cost on the statement of financial position.
Fix: Costs previously expensed cannot be capitalised later.

Worked examples

Example 1

Zeta Co spent $80,000 on research into a new material during the year ended 31 December 20X1. It then spent $50,000 on development of a product. The IAS 38 criteria were all met on 1 October 20X1, and $30,000 of the $50,000 was spent after that date. Production has not yet started. What amount is capitalised, and what is expensed in profit or loss for the year?

Show the solution

Research of $80,000 is expensed.
Development spent before 1 October is $50,000 − $30,000 = $20,000. It is expensed.
Development spent after the criteria were met is $30,000. It is capitalised.
Production has not started, so no amortisation yet.
Total expensed = $80,000 + $20,000 = $100,000.

Answer: Capitalised: $30,000. Expensed in profit or loss: $100,000.

Example 2

Delta Co capitalised development costs of $240,000. Commercial production began on 1 April 20X2 and the useful life is 5 years, straight-line. The year end is 31 December 20X2. Calculate the amortisation charge for the year and the carrying amount at the year end.

Show the solution

Annual amortisation = $240,000 ÷ 5 = $48,000.
Months in use in 20X2 = 1 April to 31 December = 9 months.
Charge for the year = $48,000 × 9/12 = $36,000.
Carrying amount = $240,000 − $36,000 = $204,000.

Answer: Amortisation charge: $36,000. Carrying amount at 31 December 20X2: $204,000.

Exam tips

Check the wording. Words like investigating, exploring and searching point to research. Words like design, prototype and testing point to development.
Look for the date the criteria were met. Only costs after it can be capitalised.
Remember that amortisation starts at commercial production, not at capitalisation.
In multiple response questions, select the stated number of criteria and watch for plausible but false items such as brand value or a guaranteed profit.
Always read what is asked: asset, expense, amortisation or carrying amount. Each gives a different number.

Practice questions from Intangible non-current assets and amortisation

Research and Development Expenditure in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Research and Development Expenditure: frequently asked questions

What is the difference between research and development expenditure in ACCA FA?

Research is original investigation to gain new knowledge, with no certain future benefit. Development applies research findings to a specific plan or design before production. Research is always expensed. Development is capitalised only when the IAS 38 criteria are met.

What are the IAS 38 criteria for capitalising development costs?

You must show probable future economic benefits, intention to complete, adequate resources, ability to use or sell the asset, technical feasibility and reliable measurement of the cost. A memory aid is PIRATE. All must be met. If any one is missing, the cost is expensed.

When do I start amortising capitalised development costs?

You start when commercial production begins, and the asset is available for use or sale. You then spread the cost over its useful life, usually straight-line. For part years, prorate by months.

Can I capitalise development costs that were expensed in an earlier year?

No. Costs that were expensed because the criteria were not yet met cannot be reinstated as an asset later. Only costs incurred after the criteria are met are capitalised.