The IAS 38 Black Hole: How Your R&D Accounting Could Destroy Years of Profits

A biotech firm just wrote off $60 million in capitalized development costs. Overnight. Their drug failed final trials, but that’s not why investors fled—they’d been capitalizing costs they should have expensed from day one.

The Research vs. Development Disaster

Everyone knows research is expensed, development can be capitalized. Simple? Here’s where companies die: When does research become development?

The false comfort zone: “We’ve finished basic research, now we’re developing the product.”

IAS 38 says: “Prove it!” You need ALL of these:

Technical feasibility ✓
Intention to complete ✓
Ability to use or sell ✓
Future economic benefits ✓
Adequate resources ✓
Reliable measurement ✓

Miss just one? Everything’s an expense.

The pharma nightmare: A drug company started capitalizing after Phase 2 trials. “We’re past research!” Auditors disagreed—regulatory approval wasn’t probable until Phase 3. Three years of capitalized costs reversed.

The Website Wipeout

Built a new website? Spent millions? Here’s the shock: Most website costs are expenses, not assets.

What you CAN capitalize:

Infrastructure (servers, software)
Design/development directly generating revenue

What you CAN’T:

Content creation
Maintenance
Marketing features
“Brand building” elements

Real carnage: An e-commerce giant capitalized $15 million for their website redesign. Auditor verdict: $3 million was infrastructure (asset), $12 million was content and marketing (expense). Profit vanished.

The Internal Software Trap

Building software for internal use? The rules change:

Research phase: Always expense
Development phase: Capitalize if criteria met
Post-implementation: Always expense

The gotcha: When does development start? Not when coding begins. Only when you’ve completed detailed design AND decided to proceed.

One bank capitalized costs from project kickoff. Reality check: First six months were feasibility studies (research). $8 million moved from assets to expenses.

The Acquisition Accounting Trick

Bought a company? Their intangibles might be assets even if yours aren’t. Customer lists worthless if internally generated become valuable assets if acquired.

The valuation trap: Paid $100 million, net assets worth $30 million. The $70 million isn’t all goodwill. You must identify and value:

Customer relationships
Technology
Brands
Non-compete agreements

Miss these? Goodwill too high, amortization too low, future profits overstated.

Your Takeaway as an Accountant

Create detailed criteria checklists for every intangible project. Date-stamp when each criterion is met. Review monthly—not at year-end. Document the “technical feasibility” moment with engineering sign-offs, not accounting judgment.

Most importantly: When in doubt, expense it. You can’t write off an asset that was never an asset—but you can destroy credibility by being too aggressive.

Turn complexity into clarity with ACCOUNTANT MINDSET—where we make the intangible tangible.