How do you determine when R&D costs transition from the research phase to the development phase under IFRS?

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AcadiFi · Accepted Answer

Under IAS 38, internally generated intangible assets follow a two-phase model. The distinction between research and deve...

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**Research Phase** -- All costs are **expensed** as incurred. Research is defined as original and planned investigation to gain new scientific or technical knowledge. There is no certainty of future economic benefits.

**Development Phase** -- Costs are **capitalized** once ALL six criteria are met simultaneously:

1. **Technical feasibility** of completing the asset
2. **Intention** to complete and use/sell the asset
3. **Ability** to use or sell the asset
4. **Probable future economic benefits** (market or internal usefulness)
5. **Availability of resources** (technical, financial, other) to complete
6. **Reliable measurement** of expenditures during development

**Mnemonic: T-I-A-P-A-R** (Technical, Intention, Ability, Probable benefits, Availability, Reliable measurement)

**Example -- Vantara Biotech (fictional):**

Vantara is developing a diagnostic device. Timeline of costs:

| Phase | Activity | Cost | Treatment |
|---|---|---|---|
| Months 1-8 | Literature review, lab experiments | $4M | Expense (research) |
| Month 9 | Prototype achieves target accuracy (technical feasibility met) | -- | Transition point |
| Months 9-14 | Prototype refinement, regulatory prep | $6M | Capitalize (all 6 criteria met) |
| Month 15 | Commercial launch | -- | Begin amortization |

\`\`\`mermaid
flowchart LR
    A[Research Phase] -->|All 6 IAS 38 Criteria Met| B[Development Phase]
    A --> C[Expense All Costs]
    B --> D[Capitalize Costs]
    D --> E[Amortize from Commercial Use Date]
    B -->|Project Abandoned| F[Impair and Write Off]
\`\`\`

**US GAAP contrast:** Under ASC 730, virtually all R&D is expensed (except software development under ASC 985-20 after technological feasibility). This makes IFRS companies appear to have higher assets and lower expenses during the development phase, which analysts must adjust for when comparing cross-listed firms.

How do you determine when R&D costs transition from the research phase to the development phase under IFRS?

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