RESEARCH AND

DEVELOPMENT COST
Computer Software
RESEARCH
• Original and planned
obligation.
• Gaining scientific or technical
knowledge and understanding.
• Discover new knowledge that
will be useful in developing
new product or that will result
in significant improvement of
such.
DEVELOPMENT
• Application of research
findings or other knowledge to
develop a new product.
Example of research activities

Laboratory research Searching for

aimed at obtaining application of
or discovering new research finding and
knowledge other knowledge.
 Conceptual Testing in search of
formulation and product or process
design of possible
alternative.
product or process
alternative.
 Examples of development
activities

Design, construction Design of tools,

and testing of jigs, molds, and
preproduction dies involving new
prototype and model. technology.
Design, construction Design, construction
and operation of a and testing of a
pilot plant that is chosen alternative
not of a scale for new or improved
economically feasible
to the entity for product or process.
commercial production
NOTE
• Activities that relate to
commercial production do not
result to research and
development cost.
• R and D activities typically
occur prior to the beginning of
commercial production and
distribution of a product or
process
 Examples of activities not
considered R and D
• Engineering follow through in an
early phase of commercial
production
• Quality control during commercial
production including routine
testing
• Trouble shooting breakdown during
production.
• Routine on-going effort to
refine, enrich or improve quality
of an existing product.
• Adaptation of an existing capability
to a particular requirement or
customer need.
• Periodic design changes to existing
products.
• Routine design of tools, jigs,
molds, and lies.
• Design and construction engineering
related to construction, relocation,
rearrangement or start-up of
facilities and equipment.
Accounting for research cost
• Expenditure on research or on the
research phase of an internal
project shall be recognized as
expense when incurred.
• An entity cannot demonstrate that an
intangible asset exists will
generate probable future economic
benefits.
Accounting for development cost

• Development cost is incurred at

a later stage in a project.
• The probability of success may
be more apparent.
• It may or may not be recognized
as an intangible asset
depending on very strict
criteria.
Criteria for recognition
a) Technical feasibility of completing
the intangible asset.
b) Intention to complete the intangible
asset and use or sell it.
c) Ability to use or sell the intangible
asset.
d) How the intangible asset will generate
probable future economic benefits.
e) Availability of resources or funding.
f) Ability to measure reliably the
expenditure attributable to intangible
asset
Acquired in-process R and D
• An in-process R and D project
acquired separately or in
business combination is
recognized as an asset at cost,
even if a component is research.
• Subsequent expenditure is
recognized as an expense if it is
a research expenditure.
• Subsequent development
expenditure is recognized as an
expense.
American Standard
The AICPA Financial Accounting
Standards Board stipulated that
expenditures for research and
development which have
alternative future use , either
in additional research project
or for productive purposes, can
be capitalized.
The following should be charged to
research and development expense:

a)Cost of materials used.

b)Depreciation of equipment used
in R and D.
c)Amortization of intangible
asset used in R and D.
Illustration
Belle Hard Company incurred the
following research and
development costs in the current
year:
Equipment acquired for use in various
R and D Projects P 975,000
Depreciation 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000
What total amount of research
and development costs should be
recognized as expense for the
current year?
Answer:

Depreciation P 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000

P 1,235,000
Internally developed computer
software
• Costs incurred in creating a
computer software product shall
be charged to expense when
incurred until a technical
feasibility has been established
for the product.
• Research stage is where there is
so much uncertainty about the
future economic benefits. All the
research costs shall be expensed
outright.
• Technological feasibility is
established when an entity has
produced either a detailed
program design of the software or
a working model.
• Capitalizable software costs- the
cost of coding and testing, and
the cost to produce the product
masters.
• The costs incurred to actually
produce the software from masters
and package the software for sale
shall be charged as inventory.
Amortization of computer
software
• The amortization method for a
computer software shall reflect
the pattern in which the future
economic benefits are expected
to be consumed by the entity.
• Straight line method is used if
such pattern cannot be
determined.
Impairment of computer
software
• The cost is amortized at the
end of reporting period over
the useful life.
• The computer is tested for
impairment whenever there is an
indication of impairment at the
end of reporting period.
Illustration
At the beginning of current year, an entity had
capitalized cost of P7,500,000 for a new
computer software product with an economic life
of 5 years.
Sales for the current year for the software
product amounted to P2,250,000.
The total sales of the software over the
economic life are expected to be P15,000,000.
At year end, the software had a fair value less
cost of disposal of P6,500,000.
The pattern of future benefits from the
computer software cannot be determined
reliably.
Accordingly the amortization of the software is
computed using the straight line method.
Journal entry
After the amortization is recorded, the carrying
amount at year-end is computed as follows:

Computer software P 7,500,000

Amortization for current year (1,500,000)
Carrying amount P 6,000,000

The carrying amount of the computer software shall

not be more than the fair value less cost of
disposal.

Otherwise, an impairment loss is recognized.

The fair value less cost is P6,500,000 which is

higher than the carrying amount.

Thus no impairment loss is recognized.

Classification of computer
software
• As a rule, computer software is
classified as an intangible asset.
• Computer software purchased for
resale shall be treated as inventory.
• A computer software purchased as an
integral part of a computer
controlled machine tool that cannot
operate without the specific software
shall be treated as property, plant
and equipment. If not, it is
classified as an intangible asset.
Illustration
GR Mangle Company spent P12,000,000 during the
current year developing a new software package.
Of this amount, P4,000,000 was spent before it
was at the application development stage and
the package was only to be used internally.

The package was completed during the year and

expected to have a four-year useful life. The
entity has a policy of taking a full year
amortization in the first year.

After the development stage, an amount of

P50,000 was spent on training employees to use
the program.

What total amount should be reported as an

expense for the current year?
Answer:
Total cost incurred P 12,000,000
Cost incurred up to development stage (4,000,000)
Cost incurred after development stage P 8,000,000

Cost incurred up to development stage P 4,000,000

Amortization of cost incurred after
development stage (8,000,000 / 4) 2,000,000
Cost of training employees 50,000
Total Expense for current year P 6,050,000
END OF THE PRESENTATION