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Statement of Financial Accounting Standards (SFAS) 2 defines research as “planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about a significant improvement to an existing product or process1” and development as “the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.1” Design includes the conceptual formulation, design and testing of product alternatives as well as construction of prototypes and operation pilot plans. Development does not include routine or periodic alterations to existing products, production lines, manufacturing processes, and other on-going operations. Market research and market testing activities are also not included in research and development costs.
The time in which research and development costs are expensed is an important factor because they represent a significant portion of the United States’ economy and a substantial cost for many companies. In 2004, research and development expenditures at universities and colleges alone in the United States were $42.945 billion2. The timing of research and development expenses can greatly effect a company’s financial statement.
Research and development costs should be expensed when incurred, and all research and development costs should be disclosed in the notes of the financial statements. This will not cause any major changes to the current standard, except the extra requirement to disclose what the research and development costs were spent on and where in the research and development process their projects currently are.
Background
All research and development costs are currently expensed as incurred in accordance with SFAS 2. Computer software is the...