Last reviewed: July 2026.
Research and development projects contain many cost types, but the accounting answer depends first on whether work is in the research phase or the development phase. Only qualifying development expenditure incurred after all recognition criteria are met is capitalised.
This guide classifies staff, contractor, material, prototype, testing, software, equipment and facility costs and explains the records needed to support the recognition date.
Research and development are separate phases
IAS 38 separates an internal project into research and development phases because the accounting treatment differs. Research is original and planned investigation aimed at obtaining new scientific or technical knowledge. Research expenditure is expensed when incurred because an entity cannot yet demonstrate an identifiable asset that will generate probable future benefits.
Development applies research findings or other knowledge to a plan or design for new or substantially improved products, processes, systems or services before commercial production or use. Development expenditure is capitalised only from the date all recognition criteria are demonstrated.
Employee and contractor costs
Salaries, wages, employer taxes and benefits of employees directly engaged in qualifying development activities can form part of the asset after the recognition date. Time records should distinguish research, development, maintenance, selling and administrative work.
External engineers, laboratories, designers and software developers may also qualify when their services are directly attributable to preparing the asset for use. General consulting, strategy, training and market research are usually expensed unless they meet another specific recognition requirement.
Materials, prototypes and testing
Materials consumed in experiments, prototypes and testing are research expense before the project satisfies the development criteria. After that date, directly attributable materials and testing costs may be capitalised when they prepare the asset for its intended use.
Sale proceeds from prototypes or test output require careful analysis under the relevant standards. Abnormal waste, failed production caused by inefficiency and costs incurred after the asset is ready for use are not part of the development asset.
Equipment, depreciation and facilities
Equipment purchased solely for an R&D project is accounted for under the applicable asset standard. Depreciation used in research is expensed; depreciation directly attributable to qualifying development after the recognition date may be included in the development asset.
Shared laboratories and facilities require a reasonable allocation method. The allocation should reflect actual consumption and should exclude idle capacity and unrelated activities. The underlying equipment remains a separate tangible asset.
Software, data and digital projects
Internal software projects often contain research-like exploration, development coding, testing, implementation, training and maintenance. Technical feasibility and the ability to complete and use or sell the product must be demonstrated before capitalisation begins.
Data cleansing, conversion and content creation do not automatically qualify. Each cost category is assessed based on whether it is directly attributable to creating the identifiable intangible asset and whether the recognition criteria are met.
The six development recognition criteria
Capitalisation begins only when the entity can demonstrate technical feasibility; intention to complete; ability to use or sell; probable future economic benefits; adequate technical, financial and other resources; and the ability to measure attributable expenditure reliably.
Passing some criteria is insufficient. Evidence may include approved budgets, technical milestones, market or internal-use analysis, funding commitments, project governance and reliable time and cost systems. Costs incurred before the date all criteria are met remain expensed and are not reinstated later.
Costs after the asset is ready for use
Capitalisation stops when the asset is in the location and condition necessary for its intended use. Training, launch campaigns, advertising, initial operating losses, routine maintenance and minor updates are generally expensed.
Subsequent enhancement expenditure is assessed as a new project or addition. It is capitalised only if it creates additional future benefits and meets the relevant recognition requirements. Repairs that merely maintain existing performance are expensed.
Project register and accounting controls
A strong R&D register records the project objective, phase, responsible manager, recognition date, evidence for each criterion, approved budget, cost codes, useful life, impairment indicators and final outcome. Stage-gate approvals help prevent premature capitalisation.
Monthly controls should reconcile payroll, purchase orders, contractor invoices and asset balances. Projects that are abandoned, delayed or commercially unsuccessful require impairment review or derecognition. Disclosures should explain material R&D expense, capitalised development and significant judgements.
Worked project-cost classification
Assume a technology project incurs 120,000 during feasibility research, 40,000 while management is still evaluating markets, and 260,000 after technical feasibility, funding, intention, resources and reliable measurement are demonstrated. The first 160,000 is expensed. The later 260,000 may be capitalised if it is directly attributable to completing the asset.
If 30,000 of the later amount relates to staff training and launch advertising, those costs remain expenses. The development asset would therefore be 230,000 before amortisation and impairment, subject to the entity’s detailed evidence and reporting framework.
Practical review checklist
- Separate research, development and post-implementation phases.
- Document the date all development criteria are met.
- Use reliable employee time and project cost codes.
- Include only directly attributable qualifying expenditure.
- Expense training, advertising and routine maintenance.
- Stop capitalisation when the asset is ready for use.
- Review abandoned or delayed projects for impairment.
- Reconcile the project register to the general ledger and disclosures.
Related Accounting Support guides
- Research and development costs under IAS 38
- Research and development disclosures
- Goodwill and intangible assets guide
Authoritative references
This educational guide explains general accounting principles. Apply the reporting framework, law and market rules relevant to the entity and jurisdiction.