I enjoy working with clients in the Life Sciences and Innovation space. When we have conversations, their excitement and passion for research is palpable. There’s no doubt in their minds that they will be changing the world, and after talking with them, I typically find myself agreeing. But it can be difficult to discuss the business aspects of a client’s company. Who cares what line item on a financial statement you debit or credit when you can change the world?
The answer is investors, the bank or the government because one of the three is likely providing the cash to move the company’s dream forward.
So let’s take a minute to talk about your research and development costs.
According to Accounting Standards Codification (ASC) 730, research and development costs are activities aimed at developing or significantly improving a product, service, process or technique that’s intended for either sale or use. The ASC also excludes a number of items from this classification including research and development work that’s under contract, routine or periodic alterations to existing products, and market research or market testing, just to name a few.
Based on ASC 730, research and development costs should be expensed as they’re incurred because any future benefits (i.e. revenues or cash coming in the door) that may be derived from these costs are too uncertain. Even if it becomes likely that revenues will be generated, they typically can’t be estimated or measured. That means you can’t capitalize these expenses as an asset on your balance sheet. In other words, these costs have to hit your bottom line.
The good news? You can identify your research and development costs on your statement of operations so that readers of your financials can understand that these costs may not be part of your typical operations and are instead an investment in the future. These costs can include materials, equipment, facilities, salaries and wages, contract services and even an allocation of indirect costs, as long as it’s reasonable, but they have to fall under the definition of research and development according to ASC 730.
It can be difficult to get excited and passionate about ASCs, but when you think about the reason for ensuring the debits and credits are handled appropriately (funding from investors, the bank or government grants) it might help pique your interest.
If you have questions, please contact me at 440-449-6800 or email email@example.com.