Accounting for research and development SSAP 13 divides research and development expenditure under three headings, excep

t for the location or exploitation of oil, gas or mineral deposits, or where all expenditure will be reimbursed by a third party. The three headings are: 1 Pure (or basic) research. Experimental or theoretical work undertaken primari ly to acquire new scientific or technical knowledge for its own sake rather than direc ted towards any specific aim or application. 2 Applied research. Original or critical investigation undertaken in order to g ain new scientific or technical knowledge and directed towards a specific practical aim or obj ective. 3 Development. Use of scientific or technical knowledge in order to produce new or substantially improved materials, devices, products or services, to install new processes or systems prior to the commencement of commercial production or commercial applica tions, or to improve substantially those already produced or installed. Expenditure incurred on pure and applied research can be regarded as part of a c ontinuing operation required to maintain a company s business and its competitive position. In general, one particular period rather than another will not be expe cted to benefit and therefore it is appropriate that these costs should be writt en off as they are incurred. The development of new and improved products is, however, distinguishable from p ure and applied research. Expenditure on such development is normally undertaken with a reasonable expectation of specific commercial success and of future bene fits arising from the work, either from increased revenue and related profits or from reduced costs. However, development expenditure should be written off in t he year of expenditure, except in the following circumstances when it may be def erred to future periods: (a) there is a clearly defined project; and (b) the related expenditure is separately identifiable; and (c) the outcome of such a project has been assessed with reasonable certainty a s to: (i) its technical feasibility; and (ii) its ultimate commercial viability considered in the light of factors such as: - likely market conditions (including competing products) - public opinion - consumer and environmental legislation (d) furthermore, a project will be of value only if: (i) the aggregate of the deferred development cost and any further development costs to be incurred on the same project together with related production, selling a nd administration costs is reasonably expected to be exceeded by related future reven ues; and (ii) adequate resources exist, or are reasonably expected to be available, to enable the project to be completed and to provide any consequential increases in worki ng capital. The elements of uncertainty inherent in the considerations set out in points (a) to (d) are considerable. There will be a need for different persons having diff ering levels of judgement to be involved in assessing the technical, commercial

and financial viability of the project. Combinations of the possible different a ssessments which they might validly make can produce widely differing assessment s of the existence and amounts of future benefits. If these uncertainties are viewed in the context of the concept of prudence, the future benefits of most development projects would be too uncertain to justify carrying the expenditure forward. Nevertheless, in certain industries it is cons idered that there are numbers of major development projects that satisfy the str ingent criteria set out above. The standard says that if the criteria are satisfied then expenditure may be def erred to the extent that its recovery can reasonably be regarded as assured. It is also required that where this policy is adopted, all projects meeting the cri teria should be included. If development costs are deferred, they should be amortised over the period of s ale or use of the product. At each accounting date the unamortised balance of development expenditure shoul d be examined project by project to ensure that it still fulfils the criteria. W here any doubt exists as to the continuation of those circumstances the balance should be written off. Fixed assets may be acquired or constructed to provide facilities for research a nd /or development activities. The use of such fixed assets will usually extend over a number of accounting periods and accordingly they should be capitalised a nd written off over their usual life. The standard requires that accounting policy on research and development expendi ture should be stated and explained. The total amount of research and development exp enditure charged in the profit and loss account should be disclosed, analysed between the current year s expenditure and amounts amortised from deferred expenditure. Movement on de ferred expenditure and the amount carried forward at the beginning and end of the perio d should be disclosed. Deferred development expenditure should be disclosed under intangible fixed assets in the balance sheet. The equivalent international standard is IAS 38 (Intangible assets). Under the I AS, development costs must be capitalised.