IAS 38 R&D costs - reliable measurement

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One of the criteria for capitalising development costs under IAS 38 is, as we all know, 'the ability to reliably measure the expenditure attributable to the intangible asset during its development'. As a company that doesn't want to capitalise R&D at this stage in our life, are we able avoid having to simply by not implementing a timekeeping system for engineers? Or is there an expectation that we attempt to measure this reliably and let auditors be the judge of our success?

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By paul.benny
06th Jun 2022 15:58

Reliable measurement of cost isn't the only criterion for recognition of an intangible asset. It must also be probable that the future economic benefits that are attributable to the asset will flow to the entity.

That second criterion is probably the easier one to argue if you don't want to capitalise R&D costs. I would probably prefer to have some sort of time recording for management purposes rather than not having one to justify a particular accounting treatment.

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Replying to paul.benny:
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By davidl243
06th Jun 2022 16:07

Of course I know there are other criteria applicable. And it is for the Engineering department to decide whether there is overall business value in them having a time recording system. My question is purely an accounting one. Is it a realistic course of action to say 'we don't have the systems to measure it reliably, so we won't'? Or there something say in IAS 1 that places the onus on an entity to proactively attempt to measure things reliably?

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By paul.benny
06th Jun 2022 18:04

If you're that bothered, you might want to check the standard yourself. The full text of IFRS and IAS can be downloaded for free from ifrs.org, subject to registration. They're a little hard to find now - search for eifrs.

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Replying to paul.benny:
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By davidl243
06th Jun 2022 21:15

This is my first time posting a question on here - I hope you are not representative of the contributors. First you answer a question I didn't ask, then you tell me to check the standard. Even just a tiny bit of helpfulness would be appreciated.

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By thevaliant
06th Jun 2022 22:56

Paul gave you a pretty straight foward way out of capitalising R&D.
Few auditors will challenge it. I know we don't, because we're not experts. Put simply, if the client says 'it's this', we can't really challenge because they're the experts and we're not.

And his suggestion re: IFRS is pretty reasonable.
Most of the regulars on here deal with small companies, sole traders and the like. I find I'm one of the few with medium and large entity clients, none of which are under IFRS either. We're all FRS102 and FRS105 mainly.
If you're under IFRS, you should have access to an auditor who can help you better than we can; unless you're opinion shopping.

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By davidl243
06th Jun 2022 23:20

Maybe I could have been clearer. I was not asking about a way out of capitalising R&D. I understand that feasibility is relatively easy to contest. Again my question is specifically about this idea of reliable measurement. Is it permissible for a company not to TRY to measure something reliably. Let's assume for arguments sake that our project(s) clearly meets the other criteria. It seems wrong for us to cite our system limitations and lack of IT investment as a reason why we don't have to do what a company that had such systems would need to do. It feels like we should have an obligation to try to measure as reliably as we can.

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By Hugo Fair
07th Jun 2022 00:43

In your original post you asked ".. are we able (to) avoid .." in what appeared to be the context of an accounting standard.
Now you're using phrases like "is it permissible" and "it seems wrong" and "it feels like we should have an obligation" ... all of which seem to relate to moral judgements rather than accounting (or legal) rules.
Hence, speaking for myself, why there is a disjunct between you & responders.

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Replying to davidl243:
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By paul.benny
07th Jun 2022 09:18

David

I'm sorry you didn't like my responses. Sometimes answers may not be to the exact question asked. Nevertheless, answers along the lines of "have you thought of this?" or even "have you misunderstood?" can be helpful.

Many people are unaware that accounting standards (and VAT guides, HMRC manuals) are freely available online.

When questions are posted, we can only go on the information in the OP. You may already have determined that there will be future economic benefits from your R&D spend. But that wasn't spelt out - hence the "have you considered?" response.

The question asked is very narrow. Accounting standards generally seek to prevent costs going to the balance sheet unless there is a strong justification. You are wanting to do the opposite. The IAS 38 criteria for capitalising R&D costs says you can only capitalise if you meet certain tests. It doesn't say you must meet those tests and therefore capitalise. (That's the "have you misunderstood?")

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