What is Research and Development Costs?
Research and development (R&D) costs are expenditures incurred to discover new knowledge (research) or to apply that knowledge to develop new or improved products and processes (development). Under IAS 38, all research costs are expensed, while development costs may be capitalised when specific criteria are met.
How It Works
- Classify spending as research (planned investigation aimed at new knowledge) or development (applying findings to a plan or design).
- Expense research costs immediately to profit or loss.
- Capitalise development costs only if all six IAS 38 criteria are met (technical feasibility, intent to complete, ability to use or sell, future benefits, available resources, reliable measurement).
- Amortise capitalised development costs over their useful life and test for impairment annually.
Saudi Context
Saudi companies investing under Vision 2030 priority sectors (tech, biotech, defence) often incur substantial R&D. The Saudi Authority for Industrial Cities (MODON) and Monsha’at offer incentives. ZATCA permits R&D capitalisation that meets IAS 38 criteria for zakat base calculations.
Example
A Riyadh biotech company spends SAR 2 million on early-stage research (expensed) and SAR 3 million on a clinical-stage product that meets the six criteria (capitalised). The SAR 3 million is amortised over the product’s 5-year useful life.