How to decide on capitalising expenditure on Development costs

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PAMDILL
PAMDILL Registered Posts: 721 Epic contributor 🐘
in AAT Level 4 (Level 8 in Scotland)
DFS Research and Development

Can anyone explain in easy terms how you decide if an item you have spent money on for use in new development can be capitalised? There is half a page of explanation in Osborne book but I can't understand it.

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  • PGM
    PGM Registered Posts: 1,954 Beyond epic contributor 🧙‍♂️
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    Needs to be work on a specific product that will produce revenues.
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    In lectures I have cited the development of a new drug for the treatment of Alzheimers disease. A lot of research has had to be undertaken in developing the drug which IAS 38 will require immediate write off to profit or loss. A drug treatment to cure it has yet to be found, but there is a drug which can improve the symptoms. At the point it was established that this drug can improve the symptoms any successive expenditure would be 'development' expenditure (i.e. to develop the drug) therefore qualifying for classification as an asset.

    Hope that helps.

    Steve
  • PAMDILL
    PAMDILL Registered Posts: 721 Epic contributor 🐘
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    So that means that any expenditure in the development of the drug would be capitalised even for example the raw materials of test samples and the wages of the person working on it. I thought it would just be the likes of special tools
  • PGM
    PGM Registered Posts: 1,954 Beyond epic contributor 🧙‍♂️
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    PAMDILL wrote: »
    So that means that any expenditure in the development of the drug would be capitalised even for example the raw materials of test samples and the wages of the person working on it. I thought it would just be the likes of special tools

    If you look at it from the point of view of 1 large project, if you know you will make profit, it would be wrong to recognise costs in one year, only for profits to be artificially high the following years. So you would include all costs associated with generating the future profits.

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