Last reviewed: July 2026.
Research vs Development Examples under IAS 38 uses practical examples to show why research expenditure is expensed and when development expenditure may qualify as an internally generated intangible asset.
The two-phase model
IAS 38 separates an internal project into research and development phases. Research is original investigation aimed at gaining new knowledge or searching for alternatives. Development applies research findings or knowledge to a plan or design for new or substantially improved products, processes, systems or services before commercial use.
Research expenditure
Research expenditure is recognised as an expense when incurred because the entity cannot yet demonstrate that an identifiable resource will generate probable future economic benefits. Examples include exploring new knowledge, evaluating alternatives, searching for materials or processes and early laboratory or feasibility work.
Development recognition criteria
Development costs are capitalised only when all specified criteria are demonstrated: technical feasibility, intention and ability to complete and use or sell the asset, probable future benefits, adequate resources and reliable measurement of attributable expenditure. Failure of one criterion means the expenditure remains an expense.
Product-development examples
Early exploration of possible product concepts is research. After management selects a design and demonstrates technical feasibility, market or internal-use benefits, funding and a reliable cost system, qualifying engineering and testing costs may enter the development phase. Routine product changes and maintenance remain expenses.
Software-development examples
Initial investigation, requirements exploration and evaluation of alternative systems are research or preliminary activities. Detailed coding and testing after feasibility, approval, resources and benefits are established may qualify as development. Training, data conversion, duplicated systems and post-implementation support are generally expensed unless another requirement applies.
Process and manufacturing examples
Searching for a new manufacturing method or testing alternative technologies is research. Designing and constructing a pre-production prototype or pilot plant may be development when the criteria are met and the asset is not itself being produced for sale as inventory. Normal production inefficiencies are not capitalised.
The capitalisation start date
Capitalisation begins on the date the entity first demonstrates all recognition criteria, not when management first discusses the project and not retrospectively from project commencement. Costs expensed before that date are not reinstated later. A formal approval gate supported by evidence makes the start date auditable.
Costs included and excluded
Direct employee costs, materials, services and an appropriate allocation of directly attributable overhead may be included after the recognition date. Selling, administration, training, identified inefficiencies, initial operating losses and costs that cannot be distinguished reliably from general operations are excluded.
After recognition
A finite-life development asset is amortised from the date it is available for use and tested for impairment when indicators arise. An asset not yet available for use is subject to the applicable annual impairment requirements. Useful life, amortisation method and residual value are reviewed under IAS 38.
Documentation and project governance
Maintain project objectives, technical milestones, feasibility evidence, budgets, funding approval, market or internal-use analysis, time records and the date each recognition criterion was met. Finance should challenge optimistic forecasts and reconcile capitalised costs to payroll, purchasing and project systems.
Research and development in service businesses
The same distinction applies outside laboratories and manufacturing. A bank exploring alternative fraud-detection techniques is conducting research; building a selected model after feasibility and benefits are demonstrated may enter development. A retailer evaluating digital channels is researching, while coding an approved platform can qualify only after every recognition criterion is evidenced.
Projects that never reach completion
Capitalisation is not guaranteed to continue until launch. If technical feasibility, funding, demand or the intention to complete is lost, the asset is assessed for impairment and further expenditure is expensed unless the criteria are again satisfied. Abandoned projects require prompt write-down, closure of project codes and documentation of the decision.
Current standard-setting context
The IASB is reviewing IAS 38 and exploring user-information needs and application issues involving newer intangible assets. The review does not by itself replace the current research-and-development recognition rules. Preparers should continue applying the existing standard while monitoring future proposals and effective dates.
Practical review checklist
- Expense all research-phase expenditure when incurred.
- Do not capitalise development until every criterion is evidenced.
- Record the exact date the project passes the recognition gate.
- Exclude training, selling, inefficiency and general administration.
- Review impairment and useful life throughout the project.
Worked example
A company spends 120,000 comparing three technologies and testing whether any can meet the required specification. That amount is research expense. On 1 October, one design is selected, technical feasibility is proven, funding is approved, probable benefits are documented and project costs can be measured reliably. Qualifying direct costs incurred from 1 October may be capitalised; the earlier 120,000 remains an expense.
Related Accounting Support guides
Continue with the research and development categories guide, recognition and measurement guide, and the purchased goodwill guide.
Authoritative references
Authoritative references: IAS 38 Intangible Assets and IAS 38 supporting material.
Key takeaway
The difference between research and development is demonstrated evidence, not the project label. Expense exploratory work, capitalise only after every IAS 38 criterion is met, and maintain project records that support the recognition date and every cost included.