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Chapter Ten Discussion – R&D Costs
Prior to 1974, accepted practice was for companies to either expense or capitalize R&D costs. In 1974, the FASB issued a standard that requires all research and development costs be charged to expense when incurred. This was controversial at the time and was opposed by many companies who preferred delaying the recognition of these expenses until later years when the expenditures provided a benefit.
Several research studies have been conducted to determine if the accounting standard had any impact on the behavior of companies. One interesting finding was that, prior to 1974, companies that expensed R&D costs were significantly larger than those companies that capitalized R&D costs. Based on this, please answer the following questions:
- Explain the FASB’s logic in deciding to require all companies to expense R&D costs in the period incurred.
- What do you think the possible reasons are why, prior to 1974, companies that expensed R&D costs were significantly larger than those companies that capitalized R&D costs?