R&D Expense
ResearchAndDevelopmentExpenseResearchAndDevelopmentExpenseExcludingAcquiredInProcessCostResearch and development (R&D) expense is what a company spends during a period on work aimed at discovering new knowledge or turning that knowledge into new or significantly improved products, services, or processes. It covers the salaries of scientists and engineers, lab supplies, contract research, and the share of facilities and equipment used for R&D work.
Under US GAAP most research and development is expensed as incurred, so the full cost reduces current-period operating income even though the benefits may arrive years later.
ASC 730 governs R&D and separates research, the planned search for new knowledge, from development, the translation of that knowledge into a plan or design for a product or process. Both are generally expensed immediately, and companies must disclose the total R&D cost charged to expense in each period. Regulation S-X Rule 5-03 does not list R&D as a required caption, but companies where it is material, such as technology, pharmaceutical, and semiconductor firms, almost always show it on its own line.
Software meant for sale is a notable exception. Under ASC 985-20, development costs are expensed until the product reaches technological feasibility and may be capitalized after that point. In-process R&D bought as part of a business combination is recorded as an intangible asset instead of being expensed. In-process R&D bought in an asset acquisition with no alternative future use is expensed right away, which can cause one-time spikes.
Companies tag the line as ResearchAndDevelopmentExpense in XBRL. Some also report ResearchAndDevelopmentExpenseExcludingAcquiredInProcessCost, which leaves out purchased in-process projects and makes the underlying spending trend easier to see.
A: The future benefits of research are too uncertain to measure reliably, so US GAAP requires most of these costs to be expensed when incurred. As a result, reported earnings at R&D-heavy companies can understate the investment they are making.
A: A common approach is R&D as a percentage of revenue, which shows how heavily a company reinvests in innovation compared with its peers and its own history. Sudden cuts can raise near-term margins at the expense of future competitiveness.
A: Yes. R&D is reported below gross profit with other operating expenses such as selling, general and administrative costs, and it reduces operating income.
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