2/23/24, 6:24 PM IFRS vs.

US GAAP: R&D costs

Advisory IFRS

IFRS vs. US GAAP: R&D costs

The accounting for research and development costs under IFRS can be
significantly more complex than under US GAAP.

IFRS Perspectives: Update on IFRS issues in the US

Companies often incur costs to develop products and services that they intend to use or
sell. The accounting for these research and development costs under IFRS can be
significantly more complex than under US GAAP

Under US GAAP, R&D costs within the scope of ASC 7301 are expensed as incurred. US
GAAP also has specific requirements for motion picture films, website development, Privacy - Terms
cloud computing costs and software development costs.

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2/23/24, 6:24 PM IFRS vs. US GAAP: R&D costs

Under IFRS (IAS 382), research costs are expensed, like US GAAP. However, unlike US
GAAP, IFRS has broad-based guidance that requires companies to capitalize
development expenditures, including internal costs, when certain criteria are met.

Based on these criteria, internally developed intangible assets (e.g. development

expenses related to a prototype in the automotive industry) are generally capitalized and
amortized under IFRS and expensed under US GAAP. This difference gives rise to two
complexities in applying IFRS: distinguishing development activities from research
activities, and analyzing whether and when the criteria for capitalizing development
expenditures are met.

Separating development from research

The starting point for companies applying IFRS is to differentiate between costs that are
related to ‘research’ activities versus those related to ‘development’ activities. While the
definition of what constitutes ‘research’ versus ‘development’ is very similar between
IFRS and US GAAP, neither provides a bright line on separating the two. Instead, a
company needs to develop processes and controls that allow it to make that distinction
based on the nature of different activities.

Research Development

Incurred in the application of

Costs related to original research findings or other
and planned investigation knowledge to a plan or design for
undertaken with the the production of new or
Definition prospect of gaining new substantially improved materials,
scientific or technical devices, products, processes,
knowledge and systems or services before the
understanding. start of commercial production or
use.

Examples Activities to obtain new Design and construction

knowledge on self- activities related to the
driving technology. development of a new self-
driving prototype.

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Search activities for Design and construction of a

alternatives for new tool required for the
replacing metal manufacturing of a new
components used in a product.
company’s current
manufacturing process.
Testing activities on a new
Search activities for a smart phone operating
new operating system system that will replace the
to be used in a smart current operating system.
phone to replace an
existing operating
system.

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Analyzing when to start capitalizing development costs

Expenditures incurred in the development phase of a project are capitalized from the
point in time that the company is able to demonstrate all of the following.

The technical feasibility of completing the intangible asset so that it will be available
for use or sale.

Its intention to complete the intangible asset and use or sell it.

Its ability to use or sell the intangible asset.

How the intangible asset will generate probable future economic benefits.

The availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.

Its ability to reliably measure the expenditure attributable to the intangible asset
during its development.

In our experience, the key factor in the above list is technical feasibility. There is no
definition or further guidance to help determine when a project crosses that threshold.
Instead, companies need to evaluate technical feasibility in relation to each specific
project. Projects related to new product developments are generally more difficult to
substantiate than projects in which the entity has more experience.

To learn more about the differences between IFRS and US GAAP, see KPMG’s
publication, IFRS compared to US GAAP.

What about acquired R&D projects ?

R&D intangible assets (in-process R&D, or IPR&D) may be acquired rather than
developed internally. As a general principle under IFRS, the acquired IPR&D is
capitalized. However, the amount capitalized and the differences between IFRS and
US GAAP depend on whether a ‘business’ or a single asset/group of assets is
acquired. Under US GAAP, only IPR&D acquired in a business combination is
capitalized post-acquisition.

The definition of a business is an area of change under both US GAAP and IFRS.
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The FASB issued ASU 2017-01, Business Combinations (Topic 805), in January
2017. The ASU sets out a new framework for classifying transactions as
acquisitions (disposals) of assets or businesses. As a result, fewer transactions
are expected to involve acquiring or selling a business. For more information,
read KPMG’s Defining Issues.

The IASB is continuing its deliberations on the feedback received on its

exposure draft, Definition of a Business and Accounting for Previously Held
Interests, which at the time was similar to the FASB’s proposals. The IASB
expects to complete its discussions in the first half of 2018.

Expect future articles addressing the definition of a business under finalized

amendments to IFRS and any differences from US GAAP, and the accounting for
IPR&D.

Footnotes

1. ASC 730, Research and Development

2. IAS 38, Intangible Assets

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Contributing authors
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Kevin Bogle PK Kalavacherla Valerie Boissou Holger Erchinger

Deal Advisory & Strategy
(DAS) Technology, Media
& Telecommunications
(TMT) Sector Lead, KPMG
LLP
Partner, DPP, KPMG US Partner, Dept. of Partner, Audit and
Professional Practice, Partner in Charge, U.S.
Read bio KPMG US Germany Corridor, KPMG
U.S. International
Read bio Corridors, KPMG US

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