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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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