1. This Statement deals with accounting for research and development activities.

2. The Statement does not deal with the following specialised activities:

(a) research and development activities conducted for others under a contract

(b) exploration for oil, gas and mineral deposits

(c) research and development activities of development stage enterprises.

3. The following terms are used in this Statement with the meaning specified:

Research is original and planned investigation undertaken with the hope of gaining new scientific or technical knowledge and understanding.

Development is the translation of research findings or other knowledge into a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or service to the commencement of commercial production.

4. An enterprise undertakes a programme of creative work to increase the stock of its scientific and technical knowledge and to devise new applications which will contribute to the maintenance of its business and its competitive position. The accounting treatment and disclosure of the costs of research and development activities are therefore important for users of financial statements.

5. There can be practical difficulties in deciding the amounts of the costs specifically attributable to research and development activities. In order to achieve a reasonable degree of comparability between enterprises, and between accounting periods of the same enterprise, it is necessary to identify the elements comprising research and development costs.

6. The costs incurred for research and development activities include the following:

(a) salaries, wages and other related costs of personnel

(b) the costs of materials and services consumed

(c) the depreciation of equipment and facilities

(d) a reasonable allocation of overhead costs. This allocation is made on bases similar to those used in allocating overhead costs to inventories (see Statement of Standard Accounting Practice 3.8), Valuation and Presentation of Inventories in the Context of the Historical Cost system)

(e) other costs, such as the amortisation of patents and licences.

7. Costs incurred to maintain production or to promote sales or existing products are excluded from the costs of research and development activities. Thus, the costs of routine or periodic minor modifications to existing products, production lines, manufacturing processes and other ongoing operations as well as routine or promotional cost market research activities are excluded.

8. However, market research activities undertaken prior to the commencement of commercial production to establish the usefulness of a product or the existence of a potential market are similar to development activities. In these cases, the related costs are sometimes treated in the same way as development costs are written off or deferred based on the same considerations.

The Accounting Treatment of Research and Development Costs

9. The allocation of the costs of research and development activities to accounting periods is determined by their relationship to the expected future benefits to be derived from these activities. In most cases there is little, if any, direct relationship between the amount of current research and development costs and future benefits because the amount of such benefit, and the periods over which they will be received, are usually too uncertain. Research and development costs are therefore usually charged to expenses in the period in which they are incurred.

12. The accounting policy adopted for the costs of research and development activities is included in the statement of accounting policies (see Statement of Standard Accounting Practice 3.2, Disclosure of Accounting Policies). When applicable, information about amortisation practices is also required (see Statement of Standard Account Practice 3.10 Information to be Disclosed in Financial Statements).

13. The disclosure of (a) research and development costs, including the amortisation of deferred development costs, charged as an expense of each period, and (b) the unamortised balance, if any, of deferred development costs, enables the users of financial statements to consider the significance of such activities in relation to those of other enterprises as well as to the other activities of the enterprise itself.

14. Further information which might usefully be provided could include, a general description of the project, the stage which the project has reached, and the estimated future costs to complete it.

Statement of Standard Accounting Practice 3.11 comprises paragraphs 15-25 of this Statement. The Standard should be read in the context of paragraph I - 14 of this Statement and the Explanatory Foreword 3.1 of the Statements of Standard Accounting Practice.

(a) the salaries, wages and other related costs of personnel engaged in research and development activities

(b) the costs of materials and services consumed in research and development activities

(c) the depreciation of equipment and facilities to the extent that they are used for research and development activities

(d) overhead costs related to research and development activities

(e) other costs related to research and development activities, such as the amortisation of patents and licences.

17. Development costs of a project may be deferred to future periods if all the following criteria are satisfied:

(a) the product or process is clearly defined and the costs attributable to the product or process can be separately identified;

(b) the, technical feasibility of the product or process has been demonstrated;

(c) the management of the enterprise has indicated its intention to produce and market, or use, the product or process:

(d) there is a clear indication of a future market for the product or process or, if it is to be used internally rather than sold, its usefulness to the enterprise can be demonstrated; and

(e) adequate resources exist, or are reasonably expected to available, to complete the project and market the product or process.

18. The deferral of development costs of a project under the criteria in paragraph 17 should be limited to the amount that, taken together with further development costs, related production costs, and selling and administrative costs directly incurred in marketing the product, can reasonably be expected to be recovered from related future revenues.

19. If an accounting policy of deferral of development costs is adopted, it should be applied to all development projects that meet the criteria in paragraph 17.

20. If development costs of a project are deferred, they should be allocated on a systematic basis to future accounting periods by reference either to the sale or use of the product or process or to the time period over which the product or process is expected to be sold or used.

21. The deferred development costs of a project should be reviewed at the end of each accounting period. When the criteria of paragraph 17, which previously justified the deferral of the costs, no longer apply, the unamortised balance should be charged as an expense immediately. When the criteria for deferral continue to be met but the amount of deferred development costs (and other relevant costs set out in paragraph 18) that can reasonably be expected to be recovered from related future revenues is exceeded by the unamortised balance of such costs, the excess should be charged as an expense immediately.

22. Development costs once written off should not be reinstated even though the uncertainties which had led to their being written off no longer exist.

24, The movement in and the balance of unamortised deferred development costs should be disclosed. The basis, proposed or adopted, for the amortisation of the unamortised balance should also be disclosed.