research and development costs

This Subtopic applies the general accounting change and error correction rules of Topic 250 to entities with regulated operations that meet the criteria of paragraph 980-10-15-2 (so that costs designated for future recovery by the regulator are probable of recovery). Its core rule is that a change in accounting method that does not affect costs allowable for rate-making purposes is reported the same way an unregulated entity would report it, whereas a change that does affect allowable costs is generally implemented the way it is implemented for regulatory purposes. It also confirms that prior period adjustments are limited to error corrections and prior interim period adjustments of the current fiscal year, and that previously unaccrued estimated refunds are charged to income when the accrual criteria are first met.

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.

ASC 730-20 governs how an entity accounts for arrangements in which other parties (often a limited partnership of investors) fund the entity's research and development. The central question is the substance of the entity's obligation: whether the entity has merely contracted to perform R&D services for others, or has in substance incurred a liability to repay the funding parties. Substance governs over form, so payments labeled royalties or option/purchase prices may in fact be settlement of a borrowing, the purchase price of an asset, or true royalties.

This subtopic tells government contractors how to account for best-efforts-basis, research-and-development-cost-sharing arrangements with the federal government. When all six scope conditions in 730-912-15-2 are met (qualifying R&D, contractor retains rights to data/results, best-efforts-only obligation, mutual expectation that costs will exceed funding, no contract combination under 606-10-25-9, and the federal government as sole or principal ultimate customer), the arrangement is not a revenue contract under Topic 606. Instead, costs are expensed as R&D as incurred under Topic 730, and customer funding is recorded as an offset to aggregate R&D expense rather than as contract revenue (730-912-25-1).

ASC 730-985 is a "link" subtopic: it contains no substantive rules of its own but points readers from the research and development Topic to the software guidance. It directs users to 985-20-25-1 for costs incurred to establish the technological feasibility of software to be sold, leased, or otherwise marketed, and to 985-20-25-8 through 25-10 for the cost of purchased software to be marketed.

ASC 985-20 governs the accounting for costs of computer software to be sold, leased, or otherwise marketed, whether internally developed or purchased. All costs incurred to establish technological feasibility are research and development expensed as incurred (985-20-25-1); costs of producing product masters after technological feasibility is established are capitalized (985-20-25-3) and capitalization ceases when the product is available for general release (985-20-25-6). Capitalized amounts are amortized product-by-product at the greater of the revenue-ratio or straight-line amount (985-20-35-1) and are written down to net realizable value at each balance sheet date (985-20-35-4).