This free, guided checker walks your finance team through the key decision points for ASC 730 Research and Development Costs. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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Isolate the transaction pattern first, because US GAAP applies different models to self-funded internal R&D, software development, acquired in-process R&D, and R&D funded by other parties. If one project combines patterns - for example, internally developed software inside a funded arrangement - run this checker separately for each component and reconcile the results in the technical memo.
Use the interactive tool above to see how this applies to your situation.
Official guidance: FASB Accounting Standards Codification
Research aims at discovery of new knowledge; development translates findings into a plan or design for a new product or process or a significant improvement (ASC 730-10-20 glossary). The common trap is sweeping routine product refreshes, seasonal design changes, customer-specific adaptations, or engineering follow-through in early commercial production into R&D - ASC 730-10-55-2 excludes all of them.
The activity is excluded from research and development; account for it under the GAAP that otherwise applies and exclude it from the ASC 730-10-50-1 disclosure.
Official guidance: FASB Accounting Standards Codification
ASC 730-10-25-2 identifies the elements of R&D cost. Once the activity qualifies as R&D, personnel, contract services, and reasonably allocated indirect costs are always expensed as incurred. Only materials, equipment, facilities, and purchased intangibles can be capitalized, and only when they have alternative future uses - so route those elements through the alternative-future-use test.
Personnel and contract-service costs identified with R&D activities are charged to expense when incurred (ASC 730-10-25-1). A reasonable allocation of indirect costs is included in R&D expense as incurred; general and administrative costs not clearly related to R&D are excluded (ASC 730-10-25-2(e)).
Official guidance: FASB Accounting Standards Codification
Apply the alternative-future-use test asset by asset at acquisition or construction. The bar is economic: the alternative use must be realistic and supportable, not merely conceivable. The same test governs assets obtained in an asset acquisition that is not a business combination - tangible and intangible assets to be used in R&D are expensed at the acquisition date unless an alternative future use exists.
Capitalize the asset; charge materials consumed, depreciation, or amortization to R&D expense as the asset is used in R&D activities (ASC 730-10-25-2(a) and (c)). An asset acquired or constructed for a particular R&D project with no alternative future use is an R&D cost charged to expense when incurred (ASC 730-10-25-1 and 25-2).
Official guidance: FASB Accounting Standards Codification
ASC 985-20-25-1 treats all costs incurred to establish the technological feasibility of software to be sold, leased, or marketed as R&D under ASC 730. The pivot point is technological feasibility - completion of a detail program design or a working model - so date-stamped evidence of that milestone controls where expensing stops. Internal-use software never enters ASC 730 through this route; it follows the ASC 350-40 stage model, and a later plan to market the software externally changes the model.
Costs incurred to establish technological feasibility are research and development costs charged to expense as incurred (ASC 985-20-25-1; ASC 730-10-25-1). After technological feasibility, capitalize software production costs under ASC 985-20-25 until general release; the ASC 730 expense model no longer applies. Apply the ASC 350-40 internal-use software stage model rather than ASC 730; capitalize application development stage costs and expense the preliminary and post-implementation stages.
Official guidance: FASB Accounting Standards Codification
The business-versus-asset determination drives the IPR&D answer. In a business combination, acquired IPR&D is capitalized at acquisition-date fair value even if it has no alternative future use. In an asset acquisition, the accumulated cost is allocated under ASC 805-50-30 and assets to be used in R&D activities are expensed at the acquisition date unless they have an alternative future use - so the next question runs that test.
Recognize acquired IPR&D as an indefinite-lived intangible asset at acquisition-date fair value, regardless of alternative future use (ASC 805-20-30-1; ASC 350-30-35-17A).
Official guidance: FASB Accounting Standards Codification
ASC 730-20-25-3 requires the transfer of the financial risk of the R&D to the funding parties to be substantive and genuine before the entity can avoid recognizing a liability. Read the executed agreements and every side letter first: repayment guarantees, mandatory purchase provisions, and automatic issuance of securities regardless of outcome each create an obligation to repay under ASC 730-20-25-4 through 25-5, whatever the arrangement is labeled.
Estimate and recognize a liability for the repayment obligation and charge the entity's R&D costs to expense as incurred (ASC 730-20-25-4).
Official guidance: FASB Accounting Standards Codification
ASC 730-20-25-6 presumes the entity will repay the other parties when surrounding conditions indicate it bears the risk in substance, and the presumption can be overcome only by substantial evidence to the contrary. A severe economic penalty counts even without legal compulsion - for example, losing rights to technology that is essential to the entity's ongoing operations if it declines to repurchase the results.
The presumption of an obligation to repay stands; recognize a liability for the funding and expense the R&D costs as incurred (ASC 730-20-25-4 through 25-6). Financial risk has substantively and genuinely transferred; account for the arrangement as a contract to perform research and development for others (ASC 730-20-25-7 through 25-8).
Official guidance: FASB Accounting Standards Codification
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