What is the general treatment of research and development costs under US GAAP?

• A. Capitalized as intangible assets
• B. Expensed as incurred unless certain criteria are met
• C. Deferred and amortized with future revenue
• D. Recorded as a separate liability

Answer: (B)

Research and development (R&D) costs are primarily treated as expenses under US GAAP. This means that these costs are expensed as incurred, reflecting the current period's financial performance rather than capitalizing them as assets. The rationale behind this treatment is that R&D activities often do not result in assured future benefits, and their outcomes are uncertain. As a result, recognizing these costs immediately provides a clearer picture of a company's financial position and performance in the period incurred.

There are specific criteria that could lead to different treatment, notably in the case of software development costs, where capitalization may occur once certain feasibility and development criteria are met. However, as a general rule for R&D expenses as defined in the broader context of US GAAP, costs must be expensed as incurred.

This approach contrasts with options that suggest capitalization or deferral, as such treatments are not aligned with the general guidance under US GAAP for R&D costs. For instance, capitalizing as intangible assets or deferring to amortize with future revenue would imply a level of certainty and future economic benefit that is often not applicable to typical R&D activities. Recording R&D costs as a separate liability does not reflect the nature of these expenditures since liabilities represent obligations, while R&D costs typically