Question

Which of the following expenditures of a US pharmaceutical company would not be capitalized? (Check all that apply.)

a) Research costs
b) Development costs related to new untested drugs

Answer 1

Expenditures of a US pharmaceutical company that would not be capitalized include research costs and development costs related to new untested drugs. Research costs are expensed as they occur and the outcome is uncertain, while development costs for untested drugs are not capitalized until certain development milestones are achieved.

Step-by-step explanation:

In accordance with generally accepted accounting principles (GAAP), some expenditures by a US pharmaceutical company are not capitalized during the research and development (R&D) phase. Specifically, the following expenditures would typically not be capitalized:

• Research costs are usually expensed as incurred, as they are considered to be the cost of doing business and not linked directly to a future economic benefit that can be measured reliably. This is because research is often exploratory in nature, and the outcomes are uncertain.
• Development costs related to new untested drugs are also generally expensed as incurred until the project reaches a certain stage of development where the future economic benefits are more certain, and the intention and ability to complete and use or sell the drug are demonstrated. This stage typically follows successful clinical trials and regulatory approval.

These accounting practices are vital for providing a true and fair view of a company's financial situation, as capitalizing such uncertain expenditures may overstate assets and understate current period expenses.