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Research and development are the costs referred to as the expenses incurred to manufacture new goods and processes. These expenses are often charged as expenses because they may not produce practical results.

Research, as defined in GAAP (FASB ASC 730-10-25), is a 鈥減lanned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about a significant improvement to an existing product or process.鈥�

Development, as defined in GAAP (FASB ASC 730-10-25), is 鈥渢he translation of research findings or other knowledge into a plan or design for a new product or process, or for a significant improvement to an existing product or process whether intended for sale or use.鈥�

FASB adopted current accounting and reporting procedures for research and development expenditures in order to decrease the number of options previously available and to offer valuable financial information about research and development costs.The FASB investigated four different accounting methods:

1. Charge all expenses to expenses when they occur,
2. capitalize all costs when they occur,
3. Selective capitalization, and
4. Accumulate all costs in a distinct category until future benefits can be established.

All research and development expenses should be charged to expenses as incurred, according to the FASB. (The authoritative R&D advice (FASB ASC 730-10-25) does not relate to activities peculiar to extractive industries businesses.) Accounting for the costs of research and development activities performed for others within a contractual agreement is covered in other publications, such as FASB ASC 730-20-5.)

The FASB evaluated three fundamental principles of expenditure recognition in making this decision:

(1) Linking cause and effect,

(2) Systematic and logical allocation, and

(3) Rapid recognition. The FASB discovered little or no evidence of a direct causal link between present R&D spending and future benefits. The FASB also indicated that the considerable degree of uncertainty surrounding future benefits, if any, of particular research and development projects makes it unlikely that capitalizing on expenses and distributing them across future years will serve any beneficial purpose.

I give the foregoing; the FASB determined that the first two principles of expenditure recognition do not apply and that the "instant recognition" concept should be used instead.

The FASB rejected the alternatives of capitalization, selective capitalization, and accumulation of costs in a special category due to the high degree of uncertainty about whether research and development expenditures will provide any future benefits, the lack of objectivity in setting criteria, and the lack of usefulness of the resulting information.

Costs incurred only for research and development should be expensed when they have incurred:

Engineering and design studies.

Costs of prototyping administrative expenditures only for R&D.

The expense of equipment created specifically for product development ($315,000).

The remaining $585,000 in the equipment should be capitalized and reported at cost, minus accrued depreciation, on the statement of financial position. The current year's depreciation expense is included in the year's research and development expense. The direct expenditures of market research and related administrative charges are not considered research and development expenses. These expenses are recorded as current income statement expenditure items and are handled as period costs.