Research and Development Under ASC 730 vs IAS 38: Why US GAAP Expenses What IFRS Capitalises, and Where the Software Rules Take Over

Two companies spend the same 1,000,000 on the same project. The one reporting under IFRS puts part of it on the balance sheet. The one reporting under US GAAP puts none of it there, unless what it built happens to be software. Neither is applying judgement badly: the frameworks ask different questions, and only one of them recognises a development phase at all.

IAS 38 splits an internal project into a research phase and a development phase, expenses the research, and then requires an intangible asset for the development expenditure once six conditions are demonstrated. Paragraph 57 says the asset shall be recognised "if, and only if" all six are demonstrated, so capitalisation here is not a policy a company may decline. ASC 730 has no such split: research and development costs are expensed as incurred, and the only route to an asset under US GAAP runs through two software subtopics most IFRS-trained candidates have never read.

The 2026 Blueprint adds a trap. The recognition criteria, finite-lived intangibles and purchased software sit in FAR; internally developed software, research and development costs and indefinite-lived intangibles sit in BAR. Study intangibles once, for FAR, and BAR will ask you to capitalise what FAR never mentioned.

The two maps side by side

Question	US GAAP	IAS 38
Research expenditure	Expensed as incurred	Expensed as incurred (paragraph 54)
Development expenditure	No development phase exists; expensed as incurred	An asset once all six conditions in paragraph 57 are met
Is capitalisation optional?	Not available at all	No. "If, and only if" cuts both ways
Phases that cannot be told apart	Irrelevant; both are expensed	Treat the project as research (paragraph 53)
Software to be sold	ASC 985-20: expense to technological feasibility, capitalise after	IAS 38, the same six conditions
Software for the entity's own use	ASC 350-40: capitalise once the project qualifies	IAS 38, the same six conditions
Costs already expensed	Cannot be reinstated	Cannot be reinstated (paragraph 71)

A worked version. A company spends 400,000 investigating alternatives, then 600,000 after settling on a design, of which 250,000 came before it could evidence the conditions. Under IAS 38 the 400,000 and the 250,000 are expense, the latter irretrievably, and 350,000 is the cost of the asset. Under US GAAP it depends on what was built. A drug or a device: all 1,000,000 is expense. Software to sell: expense to technological feasibility, capitalise after. Software for internal use: expense until the project clears the ASC 350-40 threshold, then capitalise.

IAS 38: the six conditions, and what they will never allow

Paragraph 57 requires all six before development spending becomes an asset:

1. Technical feasibility of completing the asset for use or sale.
2. Intention to complete it and use or sell it.
3. Ability to use or sell it.
4. How it will generate probable future economic benefits: a market for the output, or evidence of its usefulness internally.
5. Adequate technical, financial and other resources to finish the work and then use or sell it.
6. Ability to measure the attributable expenditure reliably.

The cost is the expenditure from the date the criteria were first met and no earlier: materials and services consumed, employee benefits, registration fees, amortisation of patents and licences used in the work. General overheads, identified inefficiencies, initial operating losses and staff training are excluded by name.

The prohibitions carry as many marks as the criteria. Internally generated goodwill is never an asset, and neither are internally generated brands, mastheads, publishing titles or customer lists, because their cost cannot be separated from the cost of building the business itself: buy a customer list and you recognise it, build the identical list and you recognise nothing. IAS 38 does require disclosure of the aggregate research and development expenditure expensed in the period, which is how an analyst sees what the balance sheet hides.

ASC 730: expensed as incurred, and why there is no development test

The US rule is older and blunter. Research and development costs are charged to expense when incurred, a position FASB Statement No. 2 took in 1974 because the link between the spending and any future benefit is too uncertain to measure.

The one part that looks like a capitalisation rule is the elements-of-cost list, and it is not one. Materials, equipment and facilities acquired for research and development are capitalised as tangible assets if they have an alternative future use, and their depreciation then becomes research and development expense; bought for one project with no other use, they are expensed immediately. The same test governs intangibles purchased from others. Personnel, contract services and a reasonable share of indirect costs are research and development costs outright.

ASC 730-10-25-4 closes the obvious loophole. Software an entity develops internally for use in its own research and development activities is itself a research and development cost, and the alternative future use test does not apply to it. You cannot capitalise the research tool by calling it software.

The one real exception comes from the acquirer's side. Assets acquired in a business combination and used in research and development activities are recognised at fair value whether or not they have an alternative future use, and acquired in-process research and development is then indefinite-lived, tested for impairment annually rather than amortised, until the project is completed or abandoned. Two companies can hold the identical half-finished project, one at fair value and one at nothing, and the difference is that one bought it.

Software to be sold: technological feasibility under ASC 985-20

For software to be sold, leased or otherwise marketed, all costs incurred to establish technological feasibility are research and development costs and are expensed. Feasibility is reached when the entity has completed the planning, designing, coding and testing needed to establish that the product can be produced to meet its design specifications, and at a minimum requires either a completed detail program design, traced to the specifications and reviewed for high-risk issues resolved through coding and testing, or, failing that, a working model confirmed by testing. Both sit late in a project, which is the point: the line falls where the remaining uncertainty is small enough that an asset exists.

From there until general release, production costs including coding and testing are capitalised. At general release capitalisation stops and maintenance and customer support become expense. Capitalised amounts are amortised product by product at the greater of the revenue ratio, current gross revenues over total current and anticipated gross revenues, and straight line over the remaining economic life. Unamortised cost is tested against net realisable value each balance sheet date, and a write-down is never reversed.

Software for internal use, and what ASU 2025-06 replaces

ASC 350-40 has run on three sequential project stages: preliminary project stage costs, incurred while the entity defines its needs and compares solutions, are expensed; eligible application development stage costs are capitalised; in the post-implementation stage maintenance is expensed and only enhancements adding functionality are capitalised. Capitalisation begins when the preliminary stage is complete, management with the relevant authority authorises and commits to funding, and completion and use as intended are probable, and ceases no later than the point at which the software is substantially complete and ready for use.

What may be capitalised in between is a closed list: external direct costs of materials and services, payroll and payroll-related costs to the extent of time spent directly on the project, interest, and software allowing access to or conversion of old data. Training costs are expensed wherever they fall, and data conversion costs are expensed apart from that one carve-out. Those two exclusions are the most commonly missed marks here.

In September 2025 the FASB issued ASU 2025-06, which removes every reference to project stages from ASC 350-40. Capitalisation will instead begin when management has authorised and committed to funding the project and completion and use as intended are probable, the "probable-to-complete recognition threshold". In applying it an entity must consider whether there is significant development uncertainty: novel, unique or unproven features whose uncertainty has not been resolved through coding and testing, or significant performance requirements not yet identified or still being substantially revised. The Update also folds the ASC 350-50 website guidance into ASC 350-40, and does not touch ASC 985-20, so technological feasibility is unchanged.

Note what that does: it imports the external-use logic of resolving high-risk features through coding and testing into the internal-use rule, which is why the FASB expects capitalisation to fall for cloud-delivered software. The amendments take effect for annual periods beginning after 15 December 2027, so a 2026 candidate answers on the project-stage model. When a pronouncement becomes testable is set by the AICPA Board of Examiners' policy on new pronouncements, which keys eligibility to the effective date; check it and the current Blueprint for your own window.

Purchased software and cloud arrangements, which FAR does test

This is the half of the topic FAR owns, and the half a working Gulf accountant meets most often. A licence to internal-use software bought from a third party is the acquisition of an intangible asset and, to the extent the fees are unpaid, a liability. A hosting arrangement conveying no licence is a service contract, and the fees are expense.

ASU 2018-15 governs the implementation work around that contract. The customer applies ASC 350-40 to decide which implementation, setup and other upfront costs to capitalise, so training and most data conversion, which fail there, fail here too. What is capitalised is expensed over the term of the arrangement, including options the customer is reasonably certain to exercise.

IFRS reaches a different destination without a software standard of its own. In an agenda decision on configuration and customisation costs in a cloud arrangement, the IFRS Interpretations Committee observed that the customer often recognises no intangible asset at all, because it does not control the supplier's software and the work creates nothing separate from it. Additional code the customer does control may be an asset if it meets the IAS 38 criteria; otherwise the costs are expensed as the supplier performs. Given how SOCPA endorses IFRS, a Riyadh software house capitalises development its US-reporting parent must expense in consolidation.

Which section asks, and how

Section	What the 2026 Blueprint puts there
FAR, Area II (30 to 40%)	The criteria for recognising an intangible asset; finite-lived or indefinite-lived classification; the carrying amount of finite-lived intangibles; purchased software and cloud computing arrangements. The Area covers intangibles "with a focus on finite-lived" ones.
BAR, Area II (35 to 45%)	Indefinite-lived intangibles including goodwill; internally developed software, for internal use or for sale, both criteria and amounts; research and development costs, identifying them and calculating the amount expensed.

So a FAR-only candidate needs the recognition criteria and the amortisation mechanics, not the capitalisation tests. Sitting both, learn it once at BAR's depth; the FAR study guide and the BAR study guide cover the rest of each Area.

What the question gives you	What it is testing
Costs split into research and development, "under IFRS"	Expense the research; capitalise only development after the six conditions
Dates for technological feasibility and general release	Expense before the first, capitalise between, stop at the second
Internal-use software with training and data conversion in the list	Strip both out before capitalising anything
A cost expensed last year that now meets the criteria	Nothing. It cannot be reinstated under either framework

Where to practise this

The fact pattern rather than the arithmetic decides the mark, so practise in pairs: the same costs under IAS 38 and then under ASC 730, the same software as an internal system and then as a product. Prepito's FAR course covers the recognition criteria, finite-lived intangibles and purchased software, the BAR course covers internally developed software and research and development costs, and the SOCPA Financial Accounting course covers IAS 38 as endorsed in the Kingdom. The qualification as a whole is the CPA programme.

The companion question, once these assets are on the balance sheet, is impairment under US GAAP versus IFRS. The other BAR divergence written the same way is share-based payment under ASC 718 and IFRS 2.

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Sources: IAS 38, the IFRS Interpretations Committee agenda decision on cloud configuration costs, FASB Statement No. 2, No. 86 and No. 142, ASU 2025-06, ASU 2018-15, and the AICPA CPA Exam Blueprints, published with the policy on when new pronouncements become testable. The superseded FASB statements are the published text of rules now codified in ASC 730, ASC 985-20 and ASC 350, which is authoritative. Blueprint weightings are revised periodically.