Research costs are expenditures incurred while an entity is exploring new knowledge, alternatives, technologies, materials, products, or processes before it can demonstrate that a specific project meets the conditions for development-stage asset recognition.
Under IAS 38, research expenditure is expensed as incurred. It is not recognized as an intangible asset.
Research versus development
The accounting distinction matters most under IFRS.
The research phase is exploratory. Management has not yet demonstrated that the project satisfies the conditions required to recognize an internally generated intangible asset.
The development phase is later. Once specified technical, economic, and resource criteria are met, qualifying Development Costs are capitalized.
If an entity cannot distinguish the research phase from the development phase, IAS 38 treats the expenditure as research and expenses it.
Examples of research activities
IAS 38 examples include activities aimed at obtaining new knowledge, searching for applications of research findings, evaluating alternatives, and formulating possible new or improved products, processes, systems, or services.
The important point is not the label a company gives a project. The recognition decision depends on whether the accounting criteria have been satisfied.
Why research costs are expensed
Research-stage uncertainty is high. At that point, the entity generally cannot demonstrate that a separately identifiable asset exists that will generate probable future economic benefits.
Immediate expensing is therefore an accounting recognition rule. It does not mean the spending has no economic value.
Investor interpretation
For an R&D-intensive company, expensed research can depress current earnings even if the work ultimately contributes to valuable products or technology.
At the same time, investors should not automatically capitalize all research spending in their own analysis. Some projects fail, useful lives are uncertain, and the link between spending and future cash flows can be difficult to establish.
This is one reason Capitalization vs. Expensing is an analytical judgment rather than a mechanical correction.
US GAAP comparison
US GAAP generally expenses research and development costs as incurred, subject to specific exceptions. The IFRS research-versus-development split therefore creates an important comparability issue for multinational peer groups.
Sources
- IFRS Foundation, IAS 38 Intangible Assets
- CFA Institute, Analysis of Long-Term Assets, 2026
- CFA Institute, Investor Perspectives: Intangible Assets, 2025
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