ASC

ASC 730-10

Overall

730 Research and Development

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In brief

IntroductoryRecognitionIntangibles and goodwillDisclosureInventory and PP&E

ASC 730-10 governs the identification and accounting for research and development (R&D) costs. The core rule is that R&D costs within scope are charged to expense when incurred (730-10-25-1), because future benefits are too uncertain and unmeasurable to support asset recognition (730-10-05-2 through 05-3). The subtopic also defines which activities count as R&D, which cost elements are R&D costs, and requires disclosure of total R&D expense for each income statement period.

Key points (7)
  • R&D costs within the scope of this Subtopic shall be charged to expense when incurred (730-10-25-1); the immediate recognition principle applies because matching cannot be applied to R&D (730-10-05-3).
  • Materials, equipment, facilities, and intangibles purchased from others that have alternative future uses are capitalized, with consumption/depreciation/amortization charged to R&D; if there is no alternative future use, the full cost is R&D expense when incurred (730-10-25-2(a) and (c)).
  • R&D costs also include personnel salaries and wages, contract services performed by others on the entity's behalf, and a reasonable allocation of indirect costs, but not general and administrative costs not clearly related to R&D (730-10-25-2(b), (d), (e)).
  • The alternative future use test does not apply to internally developed software used in R&D activities — those costs are expensed as incurred (730-10-25-4); purchased or leased software for R&D is expensed unless it has alternative future uses (730-10-25-3).
  • Excluded from scope: R&D performed for others under contract, activities unique to extractive industries, processes for selling or administrative use, routine or periodic alterations to existing products, market research or testing, and R&D assets acquired in a business combination, an acquisition by an NFP, or recognized by a joint venture upon formation (730-10-15-4).
  • R&D assets acquired in a business combination (or NFP acquisition or JV formation) are recognized and measured at fair value under Subtopic 805-20 regardless of alternative future use, then accounted for by nature (tangible) or under Topic 350 (intangible) (730-10-15-4(f)).
  • Total R&D costs charged to expense must be disclosed for each period an income statement is presented, including R&D for computer software products to be sold, leased, or otherwise marketed (730-10-50-1).

For students. The bright-line rule to memorize is immediate expensing, and the most-tested nuance is the "alternative future use" test: equipment or purchased intangibles usable elsewhere are capitalized and only the depreciation/amortization is R&D expense. Students commonly miss that this test never applies to internally developed software used in R&D (always expensed) and that IPR&D acquired in a business combination is capitalized at fair value under 805-20 regardless of alternative future use.

research and development costsexpense as incurredalternative future useindirect cost allocationin-process research and developmentinternally developed softwarecontract r&d servicespilot plant

Machine-generated study aid for ASC 730-10. Check the source paragraphs below.

730-10-00Status

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730-10-05Overview and Background

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730-10-05-1
The Research and Development Topic establishes standards of financial accounting and reporting for research and development costs. The Overall Subtopic specifies:
  1. a
    Those activities that shall be identified as research and development for financial accounting and reporting purposes
  2. b
    The elements of costs that shall be identified with research and development activities
  3. c
    The accounting for research and development costs
  4. d
    The financial statement disclosures related to research and development costs.
730-10-05-2
At the time most research and development costs are incurred, the future benefits are at best uncertain. In other words, there is no indication that an economic resource has been created. Moreover, even if at some point in the progress of an individual research and development project the expectation of future benefits becomes sufficiently high to indicate that an economic resource has been created, the question remains whether that resource should be recognized as an asset for financial accounting purposes. Although future benefits from a particular research and development project may be foreseen, they generally cannot be measured with a reasonable degree of certainty. There is normally little, if any, direct relationship between the amount of current research and development expenditures and the amount of resultant future benefits to the entity. Research and development costs therefore fail to satisfy the suggested measurability test for accounting recognition as an asset.
730-10-05-3
Also, there is often a high degree of uncertainty about whether research and development expenditures will provide any future benefits. Thus, even an indirect cause and effect relationship can seldom be demonstrated. Because there is generally no direct or even indirect basis for relating costs to revenues, the principles of associating cause and effect and systematic and rational allocation cannot be applied to recognize research and development costs as expenses. That is, the notion of matching, when used to refer to the process of recognizing costs as expenses on any sort of cause and effect basis, cannot be applied to research and development costs. The general lack of discernible future benefits at the time the costs are incurred indicates that the immediate recognition principle of expense recognition should apply.

730-10-10Objectives

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730-10-10-1
The objective of this Subtopic is to provide guidance related to research and development costs.

730-10-15Scope and Scope Exceptions

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Overall Guidance

730-10-15-1
The Scope Section of the Overall Subtopic establishes the pervasive scope for all Subtopics of the Research and Development Topic. Unless explicitly addressed within specific Subtopics, the following scope guidance applies to all Subtopics of the Research and Development Topic.

Entities

730-10-15-2
The guidance in the Research and Development Topic applies to all entities, including the following:
  1. a
    Entities in the extractive industries whose research and development activities are comparable in nature to research and development activities of other entities, such as development or improvement of processes and techniques including those employed in exploration, drilling, and extraction.

Transactions

730-10-15-3
The guidance in the Research and Development Topic applies to the following transactions and activities:
  1. a
    Those activities aimed at developing or significantly improving a product or service (referred to as product) or a process or technique (referred to as process) whether the product or process is intended for sale or use. A process may be a system whose output is to be sold, leased, or otherwise marketed to others. A process also may be used internally as a part of a manufacturing activity or a service activity where the service itself is marketed.
730-10-15-4
The guidance in this Topic does not apply to the following transactions and activities:
  1. a
    Accounting for the costs of research and development activities conducted for others under a contractual arrangement, which is a part of accounting for contracts in general. Indirect costs, including indirect costs that are specifically reimbursable under the terms of a contract, are also excluded from the scope of this Topic.
  2. b
    Activities that are unique to entities in the extractive industries, such as prospecting, acquisition of mineral rights, exploration, drilling, mining, and related mineral development.
  3. c
    The acquisition, development, or improvement of a process by an entity for use in its selling or administrative activities. A process may be intended to achieve cost reductions as opposed to revenue generation. However, (e) specifically excludes market research or market testing activities from research and development activities. Those activities were excluded because they relate to the selling function of an entity. Thus, while in the broadest sense of the word, a process may be used in all of an entity's activities, the acquisition, development, or improvement of a process by an entity for use in its selling or administrative activities shall be excluded from the definition of research and development activities. To the extent, therefore, that the acquisition, development, or improvement of a process by an entity for use in its selling or administrative activities includes costs for computer software, those costs are not research and development costs. Examples of the excluded costs of software are those incurred for development by an airline of a computerized reservation system or for development of a general management information system. See Subtopic 350-40 for guidance related to costs of computer software developed or obtained for internal use and Subtopic 985-20 for computer software intended to be sold, leased, or marketed.
  4. d
    Routine or periodic alterations to existing products, production lines, manufacturing processes, and other ongoing operations even though those alterations may represent improvements.
  5. e
    Market research or market testing activities.
  6. f
    Research and development assets acquired in a business combination, acquired in an acquisition by a not-for-profit entity, or recognized by a joint venture upon formation. If tangible and intangible assets acquired in that manner are used in research and development activities, they are recognized and measured at fair value in accordance with Subtopic 805-20, regardless of whether they have an alternative future use. After recognition, tangible assets acquired in a business combination, acquired in an acquisition by a not-for-profit entity, or recognized by a joint venture upon formation that are used in research and development activities are accounted for in accordance with their nature. After recognition, intangible assets acquired in a business combination, acquired in an acquisition by a not-for-profit entity, or recognized by a joint venture upon formation that are used in research and development activities are accounted for in accordance with Topic 350.
730-10-15-5
The guidance in this Topic may or may not apply to the following transactions and activities:
  1. a
    Development of computer software internally for its own use. If development of computer software is undertaken for the entity's own use, the software may be intended, for example, to be used in the research and development activities of the entity or as a part of a newly developed or significantly improved product or process. See Subtopic 350-40 for guidance related to costs of computer software developed or obtained for internal use.
  2. b
    Costs incurred to purchase or lease computer software developed by others are not research and development costs under this Subtopic unless the software is for use in research and development activities. See also paragraph 985-20-25-1.

730-10-25Recognition

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Accounting for Research and Development Costs

730-10-25-1
Research and development costs encompassed by this Subtopic shall be charged to expense when incurred. As noted in paragraph 730-10-15-4(f), this Topic does not apply to tangible and intangible assets acquired in a business combination, acquired in an acquisition by a not-for-profit entity, or recognized by a joint venture upon formation that are used in research and development activities.

Elements of Costs to Be Identified with Research and Development Activities

730-10-25-2
Elements of costs shall be identified with research and development activities as follows (see Subtopic 350-50 for guidance related to website development):
  1. a
    Materials, equipment, and facilities. The costs of materials (whether from the entity's normal inventory or acquired specially for research and development activities) and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs. However, the costs of materials, equipment, or facilities that are acquired or constructed for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred. See Topic 360 for guidance related to property, plant, and equipment; the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 for guidance related to impairment and disposal; and paragraphs
    360-10-35-2 through 35-6
    for guidance related to depreciation.
  2. b
    Personnel. Salaries, wages, and other related costs of personnel engaged in research and development activities shall be included in research and development costs.
  3. c
    Intangible assets purchased from others. The costs of intangible assets that are purchased from others for use in research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be accounted for in accordance with Topic 350. The amortization of those intangible assets used in research and development activities is a research and development cost. However, the costs of intangibles that are purchased from others for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred.
  4. d
    Contract services. The costs of services performed by others in connection with the research and development activities of an entity, including research and development conducted by others in behalf of the entity, shall be included in research and development costs.
  5. e
    Indirect costs. Research and development costs shall include a reasonable allocation of indirect costs. However, general and administrative costs that are not clearly related to research and development activities shall not be included as research and development costs.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Elements of costs shall be identified with research and development activities as follows:
  1. a
    Materials, equipment, and facilities. The costs of materials (whether from the entity's normal inventory or acquired specially for research and development activities) and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs. However, the costs of materials, equipment, or facilities that are acquired or constructed for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred. See Topic 360 for guidance related to property, plant, and equipment; the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 for guidance related to impairment and disposal; and paragraphs
    360-10-35-2 through 35-6
    for guidance related to depreciation.
  2. b
    Personnel. Salaries, wages, and other related costs of personnel engaged in research and development activities shall be included in research and development costs.
  3. c
    Intangible assets purchased from others. The costs of intangible assets that are purchased from others for use in research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be accounted for in accordance with Topic 350. The amortization of those intangible assets used in research and development activities is a research and development cost. However, the costs of intangibles that are purchased from others for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred.
  4. d
    Contract services. The costs of services performed by others in connection with the research and development activities of an entity, including research and development conducted by others in behalf of the entity, shall be included in research and development costs.
  5. e
    Indirect costs. Research and development costs shall include a reasonable allocation of indirect costs. However, general and administrative costs that are not clearly related to research and development activities shall not be included as research and development costs.

Computer Software

730-10-25-3
When software for use in research and development activities is purchased or leased, its cost shall be accounted for as specified by (c) in the preceding paragraph and paragraph 730-10-25-1. That is, the cost shall be charged to expense as incurred unless the software has alternative future uses (in research and development or otherwise).
730-10-25-4
Development of software to be used in research and development activities includes costs incurred by an entity in developing computer software internally for use in its research and development activities, are research and development costs and, therefore, shall be charged to expense when incurred. The alternative future use test does not apply to the internal development of computer software; paragraph 730-10-25-2(c) applies only to intangibles purchased from others. This includes costs incurred during all phases of software development because all of those costs are incurred in a research and development activity.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Development of software to be used in research and development activities, including costs incurred by an entity in developing computer software internally for use in its research and development activities, are research and development costs and, therefore, shall be charged to expense when incurred. The alternative future use test does not apply to the internal development of computer software; paragraph 730-10-25-2(c) applies only to intangibles purchased from others.

730-10-50Disclosure

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730-10-50-1
Disclosure shall be made in the financial statements of the total research and development costs charged to expense in each period for which an income statement is presented. Such disclosure shall include research and development costs incurred for a computer software product to be sold, leased, or otherwise marketed.

730-10-55Implementation Guidance and Illustrations

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Implementation Guidance

730-10-55-1
The following activities typically would be considered research and development within the scope of this Topic (unless conducted for others under a contractual arrangement—see paragraph 730-10-15-4[a]):
  1. a
    Laboratory research aimed at discovery of new knowledge
  2. b
    Searching for applications of new research findings or other knowledge
  3. c
    Conceptual formulation and design of possible product or process alternatives
  4. d
    Testing in search for or evaluation of product or process alternatives
  5. e
    Modification of the formulation or design of a product or process
  6. f
    Design, construction, and testing of preproduction prototypes and models
  7. g
    Design of tools, jigs, molds, and dies involving new technology
  8. h
    Design, construction, and operation of a pilot plant that is not of a scale economically feasible to the entity for commercial production
  9. i
    Engineering activity required to advance the design of a product to the point that it meets specific functional and economic requirements and is ready for manufacture
  10. j
    Design and development of tools used to facilitate research and development or components of a product or process that are undergoing research and development activities.
730-10-55-2
The following activities typically would not be considered research and development within the scope of this Topic:
  1. a
    Engineering follow-through in an early phase of commercial production
  2. b
    Quality control during commercial production including routine testing of products
  3. c
    Trouble-shooting in connection with break-downs during commercial production
  4. d
    Routine, ongoing efforts to refine, enrich, or otherwise improve upon the qualities of an existing product
  5. e
    Adaptation of an existing capability to a particular requirement or customer's need as part of a continuing commercial activity
  6. f
    Seasonal or other periodic design changes to existing products
  7. g
    Routine design of tools, jigs, molds, and dies
  8. h
    Activity, including design and construction engineering, related to the construction, relocation, rearrangement, or start-up of facilities or equipment other than the following:
    1. 1
      Pilot plants (see [h] in the preceding paragraph)
    2. 2
      Facilities or equipment whose sole use is for a particular research and development project (see paragraph 730-10-25-2[a]).
  9. i
    Legal work in connection with patent applications or litigation, and the sale or licensing of patents.
730-10-55-3
Nonrefundable advance payments for future research and development activities for materials, equipment, facilities, and purchased intangible assets that have an alternative future use (in research and development projects or otherwise) are within the scope of this Subtopic. Subtopic 730-20 provides guidance on accounting for nonrefundable advance payments for goods or services that have the characteristics that will be used or rendered for future research and development activities pursuant to an executory contractual arrangement.

730-10-60Relationships

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Other Assets and Deferred Costs

730-10-60-1
For guidance regarding design and development costs for products to be sold under long-term supply arrangements, see Subtopic 340-10.

Intangibles—Goodwill and Other

730-10-60-2
For guidance related to the costs of internal-use computer software, see Subtopic 350-40.
730-10-60-2A
For guidance related to website development costs, see Subtopic 350-50.
Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:
350-40-65-4Paragraph superseded by Accounting Standards Update No. 2025-06.

Software

730-10-60-4
For guidance regarding costs incurred to establish the technological feasibility of a computer software product to be sold, leased, or otherwise marketed, see paragraph 985-20-25-1.
730-10-60-5
For guidance related to a funded software-development arrangement, see paragraphs 730-20-15-1A and 985-20-25-12.

Related subtopics