Accounting Treatment of Research & Development

The increased prevalence of Irish Companies claiming R&D tax credits in recent years has made accounting for Research and Development costs and associated R&D tax credits under FRS 102 a relevant consideration.

What is Research & Development (R&D)? 

Research is defined in FRS 102 as “original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding”. An example of research is a pharmaceutical company researching options for a vaccine for a new virus. At the research stage there is a lot of uncertainty around the potential product, and whether any future economic gains might arise. 

Development is defined in FRS 102 as “the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use”. From these definitions, we can see that FRS 102 views research and development as two separate stages in the creation of a new product/process/etc. In our example above, if the pharmaceutical company finds a vaccine they will need to do further testing to ensure it is safe and find the best way to package and distribute it. 

Costs incurred in the research stage are expensed through the Statement of comprehensive income. This is because there is no expectation of future economic benefit at the research stage. If the process progresses onto the development stage, costs may be capitalised to create an intangible asset.

When can R&D be capitalised? 

An intangible asset is a non-monetary asset that has no physical form, examples include a brand name, licenses over music and patents. In order for an intangible asset to be recognised under FRS 102 it must be separable (can be separated from the entity i.e. sold / licensed / exchanged) or arise from contractual or legal rights. In the case of R&D we are concerned with the first option, i.e. the asset is separable. If we return to the example of a pharmaceutical company this stage is reached when the company could sell/licence their findings to another pharmaceutical company. 

In order to recognise an intangible asset it must be probable that expected future economic benefits attributable to the asset will flow to the entity, and the cost can be measured reliably (FRS 102 18.4). The company will need to use reasonable and supportable assumptions to assess the probability of expected economic benefits. There is a level of judgement needed to assess the probability of expected economic benefits, but this should be supported by external evidence. The cost of development may be difficult to calculate in certain instances, for example in a pharmaceutical firm the time and equipment costs may be difficult to allocate across various projects in various stages of completion. In cases such as this, the company may use timesheets for staff as well as equipment to measure the cost. 

Only cost of development can be capitalised to an intangible asset. Research costs must be expensed through the Statement of comprehensive income. If an entity is unable to distinguish between the research and development phase all costs must be expensed through the Statement of comprehensive income.

There are some items that cannot be recognised as intangible assets; these include internally generated brands, logos, customer lists, etc. Start-up costs cannot be capitalised either. 

It is an accounting policy choice to capitalise development costs as an intangible asset. A company may choose to simply expense all costs. Where a company chooses to create an intangible asset it must be consistent and capitalise all development costs to the intangible asset.


  • Initial stage of discovery. No expected economic benefits. 
  • Expense all costs through the profit and loss as they are incurred.


  • At this stage we have a seperable piece of work that could be sold/licence/etc. 
  • The expenses incurred may be capitalised to an intangible asset.

Final Product:

  • If development costs were capitalised the intangible asset will be amortised over the estimated useful of the asset.

R&D Tax Credit 

Where a company receives a tax credit from Revenue relating to its R&D activities the substance of the credit is a government grant to encourage R&D. This is treated as a government grant for accounting purposes as discussed below. 

Government Grants 

Government grants can only be recognised when there is reasonable assurance that the company will be able to comply with the requirements and the grants will be received (FRS 102 24). Government grants are recognised as income in the same period as the associated expenses are recognised. If a government grant is received in advance of the associated expenses being incurred, it will be recognised as deferred income (a liability) and released to the profit and loss as the associated expenses are incurred. Where R&D costs are being capitalised as an intangible asset the government grant will be recognised in income over the expected useful life of the asset (this will tie in with the amortisation expense recognised in the profit and loss).

For further detail on accounting for Research and Development costs and associated R&D tax credits under FRS 102, contact Conor O'Brien, Partner or Lindsay Webber, Manager.

R&D Update

RBK Chartered Accountants and RDP Associates, a leading international R&D tax credit consultancy, invite you to attend our R&D Tax Credits & Grants update on 26th February 2020.

For further details and to register, visit:

Conor O'Brien

Audit & Business Advisory Partner

View Profile