Accounting for development costs

Innovative companies and startups often have high expenditures for research and development. However, it takes years before a product is market-ready. Under certain conditions, the incurred costs can already be recorded as an asset on the balance sheet side before that.

Research and Development

In the IFRS, the creation of a new product is differentiated into a research and a development phase. Research is understood as independent and systematic investigations to obtain new scientific and technological knowledge. Development, on the other hand, involves the application of the results of research (along with other knowledge) to design and produce new and improved products. While the costs for basic research are to be recorded as expenses in the income statement, the costs for the development of a new product can be recorded as an asset (capitalized) on the asset side of the balance sheet (known as capitalization).

Intangible Asset

Development costs are intangible assets. These are identifiable, non-monetary assets without physical substance. In addition to development costs, for example, patents or licenses are also intangible assets. Intangible assets can generally be capitalized if it is probable that the expected future economic benefits from the asset will flow to the company and if the acquisition or production costs can be reliably measured (IAS 38.21).

Development Costs

For development costs, a special intangible asset, to be capitalized, six additional conditions must be met. These are: