Syllabus D. Audit of Historical Financial Information D3. Evaluation and review

D3a. Development cost 8 / 41

Syllabus D3a)

Evaluate the matters (e.g. materiality, risk, relevant accounting standards, audit evidence) relating to:
xvii)  intangible assets

Research and Development Definitions


Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

  • An example of research could be a company in the pharmaceuticals industry undertaking activities or tests aimed at obtaining new knowledge to develop a new vaccine. 

    The company is researching the unknown, and therefore, at this early stage, no future economic benefit can be expected to flow to the entity.


Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services, before the start of commercial production or use.

  • An example of development is a car manufacturer undertaking the design, construction, and testing of a pre-production model.

Accounting Treatment of Research and Development

  1. Research costs

    IAS 38 states that all expenditure incurred at the research stage should be written off to the income statement as an expense when incurred, and will never be capitalised as an intangible asset.

  2. Development costs

    Should be capitalised as an intangible assets if meet the following criteria.

    Dr Intangible non-current assets (SOFP)
    Cr Bank/Payables

Under IAS 38, an intangible asset must demonstrate all of the following criteria:

  • P robable future economic benefits

  • I ntention to complete and use or sell the asset

  • R esources (technical, financial and other resources) are adequate and available to complete and use the asset

  • A bility to use or sell the asset

  • T echnical feasibility of completing the intangible asset (so that it will be available for use or sale)

  • E xpenditure can be measured reliably

Audit procedures:

  1. Are the development costs material?

  2. Evaluate whether the development costs meet the recognition criteria (PIRATE)