Historical review of the accounting treatment of research and development costs

              The Accounting Historians Journal Vol. 19, No. 1 June 1992
Paul E. Nix MONTANA STATE UNIVERSITY and David E. Nix BOISE STATE UNIVERSITY
A HISTORICAL REVIEW OF THE ACCOUNTING TREATMENT OF RESEARCH AND DEVELOPMENT COSTS
Abstract: This study reviews the literature and the practice of ac-counting for research and development (R&D) costs from the first reference in 1917 to the current treatment. The conceptual treatment of R&D is compared to current financial accounting rules and expla-nation of the evolution of the current rules is presented. The eco-nomic and social consequences of the current rules which require R&D costs to be expressed are examined. The paper explores possible alternative treatment of R&D costs. As a contrast to U.S. practice, the accounting treatment of R&D costs in other countries is discussed. Given the findings of this paper, a strong case can be made for changing the way that R&D costs are accounted for in the United States.
In today's rapidly changing world which relies increasingly on technology, the investments made in research and develop-ment (R&D) are more critical than ever to the economic future of companies and countries. The current financial accounting for R&D costs in the United States is to expense these costs as incurred.1 While this accounting treatment is certainly question-
1 Attempts have been made by authors such as Higgins (1954) to distinguish between research costs and development costs:
Development costs are usually thought of as being the costs of attempting to convert the results of research to a commercial basis. Since the terms "research" and "development" are often used inter-changeably, it is important to distinguish between the two. Re-search in industry today is usually used in connection with prod-ucts currently being produced or with new products and is com-monly termed "general research." It includes the study of the suit-ability of materials for specific purposes, the experimental testing of material, the study of manufacturing processes, and techniques and similar research work.
Unless otherwise indicated, which is frequently done, R&D costs are consid-ered as a single cost in this paper. Development costs are frequently referred to