The financial accounting term research and development costs refer to those expenses associated with investigations into new processes or techniques (research) and the translating of this information into new designs, products, or processes (development).
Companies are required to expense all research and development costs as incurred. If costs are incurred that provide a tangible future benefit, they should be capitalized and depreciated or amortized over their useful lives.
Generally, research and development are defined in the following manner, as part of the Financial Accounting Standards (FASB No. 2):
The FASB goes on to state that development includes the conceptual formulation, design, and testing of product alternatives, construction of prototypes, and operation of pilot plants. It also defines what development does not include: routine or periodic alterations to existing products, production lines, manufacturing processes and other on-going operations.
The following guidelines apply unless the items have alternative future use. If so, the item would be capitalized and depreciated (tangible assets) or amortized (intangible assets):
The definition of R&D costs explicitly excludes selling, general, and administrative expenses.