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Statements of Accounting Standards (AS 8)
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 recognised
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 specialised 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 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. 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 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.
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 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) 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 amortisation of patents and licences.
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 unamortised balance
should be charged as an expense immediately. When the criteria for
deferral continue to be met but the amount of unamortised 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 amortised 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'.
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