Research and development in accounting practice
Do you invest in research and development in the course of your business? If you do, you should also know how to properly account for R&D costs. These items are not so commonly used by companies and claiming them may pose certain challenges. We have prepared an article about what is important to keep an eye on and what processes to set up in your company to keep everything by the book.
Research as a current period cost
What does the term “research” actually mean? The definition can be found in the National Accounting Council (NÚR) Guideline No. I-40. It means “original and planned inquiry carried out with a view to obtaining new scientific or technical findings and knowledge”. From 1 January 2018, the research outcomes have been removed from the list of intangible fixed assets. The main reason was that assets should only include property that brings economic benefit to the accounting entity, which is not a certainty in research. Therefore, research costs are reported in the costs of the current period.
Development in the company should be considered a project
How is the term “development” understood, then? Again, you can find the answer in the above NÚR guideline: “the application of research outcomes or other findings in order to plan or design new or substantially improved materials, equipment, products, processes, systems or services, before the start of their commercial production or use.” However, how to ensure that the development costs are included in intangible fixed assets? It must meet all the following conditions:
- The entity is able to demonstrate the technical feasibility of the completion of the intangible asset;
- The entity is able to demonstrate the intent and ability to complete and use the intangible asset related to the development;
- There is an assumption of future economic benefits that will be higher than the costs incurred;
- The entity is able to demonstrate the availability of resources to complete the intangible asset;
- The intangible asset can be reliably evaluated according to accounting regulations.
In addition to demonstrating the aforementioned points, it would be appropriate to approach any development as a project and keep detailed records about it. For example, accounting with respect to centres or contracts is adequate and will ensure sufficient clarity and transparency. We also recommend appointing a person responsible for this “project” in your company. It will be primarily up to this person to ensure that compliance with the above conditions can be demonstrated.
Choose the right procedure
First of all, it is important to set up an expenditure budget. Throughout the entire development period, the value of the future asset should be lower than the benefit from the sale. Even at the start, the responsible person should be able to determine the total development expenditure and the value of the asset’s contribution. The calculations can then also include non-direct costs such as utilities and rent. Throughout the entire development process, you should also keep an eye on whether the budget corresponds to reality and what the current value of the asset looks like.
What to do if you don’t know how to proceed
In recent years, Czech companies have increased their research and development spending. At AICCON, we welcome this positive trend and are ready to explain the relevant issues to you. We will help you set up correct accounting processes so that you can focus on innovation and modernisation of your business.