Chapter 10, Problem 10.8BYP

Judgment Case 10–8

Research and development

• LO10–8

Prior to 1974, accepted practice was for companies to either expense or capitalize R&D costs. In 1974, the FASB issued a Standard that requires all research and development costs to be charged to expense when incurred. This was a controversial standard, opposed by many companies who preferred delaying the recognition of these expenses until later years when presumably the expenditures bear fruit. Several research studies have been conducted to determine if the Standard had any impact on the behavior of companies. One interesting finding was that, prior to 1974, companies that expensed R&D costs were significantly larger than those companies that capitalized R&D costs.

Required:

1. Explain the FASB’s logic in deciding to require all companies to expense R&D costs in the period incurred.

2. Identify possible reasons to explain why, prior to 1974, companies that expensed R&D costs were significantly larger than those companies that capitalized R&D costs.