Close Menu
    Facebook LinkedIn YouTube Instagram X (Twitter)
    Blue Tech Wave Media
    Facebook LinkedIn YouTube Instagram X (Twitter)
    • Home
    • Leadership Alliance
    • Exclusives
    • Internet Governance
      • Regulation
      • Governance Bodies
      • Emerging Tech
    • IT Infrastructure
      • Networking
      • Cloud
      • Data Centres
    • Company Stories
      • Profiles
      • Startups
      • Tech Titans
      • Partner Content
    • Others
      • Fintech
        • Blockchain
        • Payments
        • Regulation
      • Tech Trends
        • AI
        • AR/VR
        • IoT
      • Video / Podcast
    Blue Tech Wave Media
    Home » What is R&D capitalisation?
    02-08-r-and-d-capitalization
    02-08-r-and-d-capitalization
    Social

    What is R&D capitalisation?

    By Elodie QianAugust 2, 2024Updated:August 5, 2024No Comments4 Mins Read
    Share
    Facebook Twitter LinkedIn Pinterest Email
    • R&D Capitalisation is the process of treating research and development (R&D) cost not as an expense but an asset on a company’s balance sheet.
    • R&D Capitalisation not only helps to reflect more accurately the long-term value of a company’s investment, but also avoids short-term fluctuations in profits caused by one-off expensing.

    In the world of business, Research and Development (R&D) is a critical component for innovation and growth. However, understanding how to account for R&D expenses can be a bit tricky. One method of accounting for these costs is through R&D capitalisation. This article aims to demystify this concept.

    What does R&D capitalisation mean

    Research and Development Capitalisation (R&D Capitalisation) is the process by which a company transfers the costs of its research and development (R&D) activities from current expense to asset treatment.

    This means that these costs are no longer charged directly to current expenses in the income statement, but are managed as an asset item on the balance sheet and are gradually charged to profit or loss through depreciation or amortisation over the next few years.

    Also read: How much does a commercial EV charging station cost?

    Why capitalize R&D costs

    This treatment of capitalisation has significant implications for a company’s financial statements and tax strategy.

    Firstly, it changes the accounting treatment of R&D costs so that these costs no longer directly affect net income in the current period, but are spread over multiple future accounting periods through depreciation or amortisation.

    Second, capitalised R&D expenditure can increase a company’s total assets, thereby enhancing its financial health and investment attractiveness.

    In addition, some scholars argue that capitalising R&D expenses is a more conservative accounting strategy. This is because capitalised assets are reflected on the balance sheet as part of intangible assets, which gradually depreciate in value over the course of their use.

    Therefore, capitalisation not only helps to reflect more accurately the long-term value of a company’s investment, but also avoids short-term fluctuations in profits caused by one-off expensing.

    When to capitalize R&D costs

    Not all R&D costs can be capitalized. According to the Financial Reporting Standard (FRS) 103, issued by the Accounting Standards Board (ASB) in the UK, R&D costs can be capitalized under certain conditions:

    • Technological feasibility: The company must have evidence that the project is technologically feasible.
    • Intention to complete: The company must have the intention and resources to complete the project.
    • Future economic benefits: It is probable that future economic benefits will flow to the company.
    • Able to measure costs reliably: The costs associated with the project can be measured reliably.

    Also read: Copilot cost: Is it worth the investment?

    How to capitalize R&D costs

    The process of capitalizing R&D costs involves several steps:

    • Identify eligible costs: Determine which costs are eligible for capitalisation based on the criteria mentioned above.
    • Categorize costs: Separate R&D costs into research and development phases.
    • Allocate costs: Allocate costs to specific projects or products.
    • Capitalize costs: Record the eligible costs as assets on the balance sheet.
    • Amortize or impair: Over time, these costs are amortized (spread out over several years) or tested for impairment if their value is in doubt.

    Challenges of R&D capitalisation

    While there are benefits, R&D capitalisation also comes with challenges:

    • Complexity: The process can be complex and requires careful tracking and allocation of costs.
    • Accounting standards: Different regions may have different rules and standards for capitalizing R&D costs.
    • Risk of impairment: If a project fails or the expected benefits do not materialize, the capitalized costs may need to be written off, impacting the company’s financial health.

    R&D capitalisation is a strategic financial decision that can enhance a company’s financial reporting and reflect the long-term value of its innovation efforts. However, it requires careful consideration of the costs involved and adherence to accounting standards.

    Accounting Standards Board (ASB) Financial Reporting Standard (FRS) 103 R&D capitalization
    Elodie Qian

    Elodie Qian is an intern reporter at BTW Media covering artificial intelligence and products. She graduated from Sichuan International Studies University. Send tips to e.qian@btw.media.

    Related Posts

    CoreWeave acquires Core Scientific in $9bn AI infrastructure deal

    July 9, 2025

    OpenAI tightens security amid DeepSeek ‘copy’ allegations

    July 9, 2025

    Comcast moves more data with less energy used

    July 9, 2025
    Add A Comment
    Leave A Reply Cancel Reply

    CATEGORIES
    Archives
    • July 2025
    • June 2025
    • May 2025
    • April 2025
    • March 2025
    • February 2025
    • January 2025
    • December 2024
    • November 2024
    • October 2024
    • September 2024
    • August 2024
    • July 2024
    • June 2024
    • May 2024
    • April 2024
    • March 2024
    • February 2024
    • January 2024
    • December 2023
    • November 2023
    • October 2023
    • September 2023
    • August 2023
    • July 2023

    Blue Tech Wave (BTW.Media) is a future-facing tech media brand delivering sharp insights, trendspotting, and bold storytelling across digital, social, and video. We translate complexity into clarity—so you’re always ahead of the curve.

    BTW
    • About BTW
    • Contact Us
    • Join Our Team
    TERMS
    • Privacy Policy
    • Cookie Policy
    • Terms of Use
    Facebook X (Twitter) Instagram YouTube LinkedIn

    Type above and press Enter to search. Press Esc to cancel.