Question

Are research and development costs incurred by an entity capitalized or expensed under IFRS and US GAAP?

1) Capitalized under both IFRS and US GAAP
2) Expensed under both IFRS and US GAAP
3) Capitalized under IFRS and expensed under US GAAP
4) Expensed under IFRS and capitalized under US GAAP

Answer 1

Under IFRS, research costs are expensed and development costs can be capitalized if certain criteria are met, while under US GAAP, both research and development costs are generally expensed as incurred.

Step-by-step explanation:

In terms of accounting for research and development (R&D) costs, the treatment varies between International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP). Under IFRS, research costs are always expensed as incurred. However, development costs can be capitalized once certain criteria are met, such as demonstrating the technical feasibility of completing the asset, the intention to complete and use or sell the asset, and the ability to use or sell the asset.

In contrast, US GAAP generally requires R&D costs to be expensed as incurred. This includes costs associated with the development phase. Therefore, the correct answer is option 3) Capitalized under IFRS and expensed under US GAAP.