CIRD99200 - R&D tax credits: accountancy: IAS38

IAS38 is the international accounting standard for intangible assets; there is no separate standard for R&D. Normally the purpose of R&D is to create an intangible asset; the standard would regard this as an internally generated intangible asset and addresses itself to the question of whether it should be recognised as an intangible asset on the balance sheet.

The standard recognises two phases in the generation of an asset:

• Research phase - examples of such activities are those aimed at:

• • the acquisition of new knowledge,
  • the search for, evaluation and final selection of, applications of research findings and other knowledge,
  • the search for alternatives for materials, devices, products, processes, systems or services,
  • the formulation, design, evaluation and selection of possible new or improved materials, devices, products, processes, systems or services.

• Development phase - examples of such activities are:

• • the design, construction and testing of pre-production or pre-use prototypes and models,
  • the design of tools, jigs, moulds and dies involving new technology,
  • the design, construction and operation of pilot plant that is not of a scale economically feasible for commercial production,
  • the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes systems or services.

How IAS38 treats the expenditure

If it is not possible to distinguish the development phase of a project from the research phase of a project all of the expenditure should be treated as if it had been incurred in the research phase.

The expenditure of the research phase of a project should be recognised as an expense when incurred.

If certain criteria are met the expenditure of the development phase of a project should be capitalised in the balance sheet as the cost of an intangible asset. Otherwise the expenditure should be recognised as an expense when incurred.

HMRC officers with questions concerning accountancy should consult their local Revenue Accountant.

R&D expenditure incurred after adoption of IAS

See CIRD81450.

R&D expenditure incurred before adoption of IAS and written off through the profit and loss account

If R&D revenue expenditure which has previously been expensed is written back to the balance sheet as an intangible asset as a result of adoption of IAS, only to be amortised over a greater period under IAS, this change of accounting practice will fall within the provisions of CTA09/S183(1) - with the uplift being exempt from tax and the subsequent amortisation not being allowed.