At first glance, life sciences and innovation have very little to do with financial statements. After all, professionals working in this field are passionate about the research they’re conducting and how it will affect the world. That’s where investors, banks, or the government enter the picture. After all, someone is providing the money to advance your company’s dream.

So, let’s take a minute to talk about your research and development costs.

According to Accounting Standards Codification (ASC) 730, research and development costs are activities aimed at developing or significantly improving a product, service, process, or technique intended for either sale or use. The ASC also excludes a number of items from this classification, including research and development work that’s under contract, routine or periodic alterations to existing products, and market research or market testing, just to name a few.

Based on ASC 730, research and development costs should be expensed as they’re incurred because any future benefits (i.e., revenues or cash coming in the door) that may be derived from these costs are too uncertain. Even if it becomes likely that revenues will be generated, they typically can’t be estimated or measured. That means you can’t capitalize these expenses as an asset on your balance sheet. In other words, these costs must hit your bottom line.

The good news? You can identify your research and development costs on your statement of operations so readers of your financials can understand these costs may not be part of your typical operations and are instead an investment in the future. These costs can include materials, equipment, facilities, salaries and wages, contract services, and even an allocation of indirect costs, as long as it’s reasonable. But they have to fall under the definition of research and development according to ASC 730.

It can be difficult to get excited and passionate about ASCs, but when you think about the reason for ensuring the debits and credits are handled appropriately (funding from investors, the bank or government grants), it might help pique your interest. For more information about ASC 730 financial statement requirements, contact your Springline professional.

TAGS: Audit & Assurance, Financial Statement Audits

Brandi DiGiorgio

Brandi helps business owners accomplish their goals by providing knowledgeable, industry-specific advice combined with a high-level of customer service. She takes the time to get to know her clients, both professionally and personally, to better understand their goals and help them find ways to reach them. As chair of the Assurance and Business Advisory Department, she is instrumental in the development and implementation of the assurance process used by the Springline team.