In the accounting standards defines research and development expenditure as falling into more of the following categories.
- Pure research is originally research to obtain new scientific or technical knowledge or understanding. There is no clear commercial and in view and such research work does not have a practical application. Companies and other business entities might carry out this type of research in the hope that it will provide new knowledge which can subsequently be exploited.
- Applied research is originally research work which also seeks to obtain new scientific or technical knowledge, but which has a specific practical aim or application. Applied research may develop from pioneering pure research, but many companies have full time research teams working on applied research projects.
- Development is use of existing scientific and technical knowledge to produce new products or systems, prior to starting commercial production operations.
How to distinguish these categories?
The dividing line between each of these categories will often be indistinct in practice, and some expenditure might be classified as research or as development. It may be even more difficult to distinguish development costs from production costs.
Accounting standards states that although there may be practical difficulties in isolating research costs and development costs, there is a difference of principle in the method of accounting for each type of expenditure.
- Expenditure on pure and applied research is usually a continuing operation which is necessary to ensure a company’s survival.
- One accounting period does not gain more than any other from such work, and it is therefore appropriate that research costs should be written off as they are incurred.
- The development of new and improved products is different, because development expenditure is incurred with a particular commercial aim in view and in the reasonable expectation of earning profits or reducing costs.
- In these circumstances it is appropriate that development costs should be deferred and matched against the future revenues.