# ASC 730-20-05: Research and Development — Research and Development Arrangements — 05 Overview and Background Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/730/20/#05-overview-and-background) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:dad08fda6df2e5b5f94fff358fed8baf163477d7961a2758630917a59fc18668 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 730-20-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/730/20/#05-overview-and-background) SEC content: no ##### [730-20-05-1](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:66d22d5024d661bf2f12a9057145e670d6658703e175f3b969d8a9fa775c8751 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic provides guidance on [research and development](https://asc.understandingaccounting.org/glossary/r/#research-and-development "Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service (referred to as product) or a new process or technique (referred to as process) or in bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. It includes the conceptual formulation, design, and testing of product alternatives, construction of prototypes, and operation of pilot plants.") arrangements. Research and development arrangements have been used to finance the research and development of a variety of new products, such as information processing systems, medical technology, experimental drugs, electronic devices, and aerospace equipment. Entities may enter into arrangements for any of the following reasons: 1. a To transfer all or part of the uncertainty and risk involved with the research and development to others 2. b To obtain the benefit of funds that are made available because of tax incentives for investors 3. c To attract qualified research and development personnel who otherwise might be concerned that funding might not be assured 4. d To avoid expanding the ownership of the entity and the impact on earnings per share (EPS) that would result from issuing equity securities 5. e To avoid debt service expenditures and the impact on the entity's debt-to-equity ratio that would result from issuing debt securities 6. f To avoid the impact on the entity's near-term earnings that would result if it incurred the related research and development expenses. ##### [730-20-05-2](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:0c1e77cfa7015f74de4153b8bfe0312b514356e51e73834ac8d421a145311c6d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Many arrangements are formed as limited partnerships. In some, the entity or a [related party](https://asc.understandingaccounting.org/glossary/r/#related-parties "Related parties include: Affiliates of the entity Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management Principal owners of the entity and members of their immediate families Management of the entity and members of their immediate families Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.") is the general partner who manages the research and development activities. Sometimes, the limited partners are related to the entity. In some arrangements, the entity has the basic technology needed for the research and development and has performed preliminary research and development work to determine the attractiveness of further work. The entity might contribute the preliminary research and development work and basic technology to the partnership for a minor equity interest or might license or give the rights to the preliminary work and basic technology to the partnership. ##### [730-20-05-3](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:78be32e92bf2c971fe53fded31e007716b67e5bca8d49aa61bdbca4f26280646 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The terms of the arrangement usually contemplate, but do not guarantee, that the funds provided by the limited partners will be sufficient to complete the intended research and development. However, some agreements permit or require the general partner to sell additional limited-partnership interests or to use its own funds if the funds provided are insufficient to complete the research and development effort. The entity sometimes provides additional funds through loans or advances to the partnership. Repayment of the loans or advances sometimes is guaranteed by the partnership although repayment sometimes is contingent on realization of future economic benefits of the research and development; for example, repayment might be made through offsets against the purchase price for the results of the project or against royalty payments. ##### [730-20-05-4](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:1278d58e1c7c561c2d453f1ed8d6084c41576f6247fe45992059c0cb2b9013f5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The entity or a related party of the entity usually performs the research and development work under a contract with the partnership. The compensation under the research and development contract usually is either a fixed fee or reimbursement of direct costs plus a fixed fee or fixed percentage of those costs. The work is performed on a best-efforts basis with no guarantee of either technological or commercial success. The partnership retains legal ownership of the results of the research and development and sometimes retains legal rights to the basic technology provided by the entity. ##### [730-20-05-5](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:05a664abb424684abccfc2d2c2556e8cc9fb7c5bc415d861f93fed8b0ee45ca7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Either as part of the partnership agreement or through contracts with the partnership, the entity usually has an option either to purchase the partnership's interest in or to obtain the exclusive rights to the entire results of the research and development in return for a lump sum payment or royalty payments to the partnership. Some arrangements contain a provision that permits the entity to acquire complete ownership of the results for a specified amount of the entity's stock or cash at some future time. In some of those purchase agreements, the partnership has the option to receive either the entity's stock or cash; in others, the entity makes the decision. Sometimes, warrants or similar instruments to purchase the entity's stock are issued in connection with the arrangement. ##### [730-20-05-6](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:0193fe590930fb7f4b113326e577e8c76d9470383f4909c9d58413655ac4b5d5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity that is a party to an arrangement through which research and development is funded by other parties usually incurs an obligation when it enters into the arrangement. The nature and extent of the entity's obligation are sometimes difficult to determine and can range from an obligation to perform contract research and development work to an obligation to repay the other parties, with a return, for the funds provided. ##### [730-20-05-7](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:73d2239c0996a31607732035ce35734be6302970765a5b8813328a8bba4109aa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the results of the research and development are determined to have sufficient future economic benefit, the entity probably will exercise its option either to purchase the partnership's interests in or to obtain the exclusive rights to the entire results. If the results do not have future economic benefit, the entity usually is not legally required to exercise its option; however, there may be valid business reasons for the entity to acquire the results even though the original objectives of the research and development are not met. For example, the entity may want to obtain ownership of results that have value to the entity even though they do not meet the original objectives. ##### [730-20-05-8](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:16139cc8000199f0ba8e773077ca1f0091dd3fbed22a90d70a07f19f93d98e29 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Other reasons to acquire the results of research and development may be: 1. a To maintain the ability to enter into another arrangement with the same parties or similar arrangements with other parties 2. b To recover the ownership of or rights to the entity's basic technology or to prevent the partnership from providing that technology to others 3. c To avoid any potential future claim against the use of the results 4. d To fulfill a moral obligation (for example, the entity is the general partner and due to a conflict of interest feels compelled to exercise its option). ##### [730-20-05-9](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:09ea55200e469a5033239877417df330c13036a0828cbed9754df31685b760c4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Although the entity's legal liabilities will be specified in the various contracts and agreements under the arrangement, accounting representations should not necessarily be limited to legal requirements. Depending on the facts and circumstances involved in a particular research and development arrangement, future payments by the entity to the other parties ostensibly for royalties or to purchase the partnership's interests in or to obtain the exclusive rights to the research and development results might actually be any of the following: 1. a The settlement of a borrowing 2. b The purchase price of an asset 3. c The royalties for the use of an asset. The financial reporting of an entity that is a party to a research and development arrangement should represent faithfully what it purports to represent and should not subordinate substance to form. ##### [730-20-05-10](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:2c1d373670c1d868d6bdc5704296f68e8ed60099584a40add4806d069080dd2c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The legal structure of a research and development arrangement may take a variety of forms and often is influenced by federal and state income tax and securities regulations. An entity might have an equity interest in the arrangement, or its legal involvement might be only contractual (for example, a contract to provide services and an option to acquire the results of the research and development). ##### [730-20-05-11](https://asc.understandingaccounting.org/asc/730/20/#730-20-05-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:15:00.952Z to 2026-09-10T01:15:00.952Z Record version: sha256:492aa9030ab1855f13a9c2f2466f54761142ebcc7a942adda3ffebffe5eb0537 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For guidance on consolidation of a research and development arrangement, see Subtopic 810-30. An overview can be found in Section 810-30-05.