Research and Development Expense

Research and development, usually called R&D, covers the salaries of scientists, engineers and designers, laboratory costs, materials used in experiments and other spending aimed at innovation. It is especially important for technology, pharmaceutical and engineering companies.

On the income statement, R&D is usually shown as a separate operating expense. Under most accounting rules, research costs are expensed as they are incurred, because their future benefits are uncertain. Under IFRS, certain development costs can be recorded as an intangible asset once a project meets strict conditions showing it is likely to produce future benefits. US GAAP generally requires R&D to be expensed, with some exceptions such as certain software costs.

For example, a drug company might spend 2 billion a year on R&D, most of which will never lead to a successful product.

Investors often look at R&D as a percentage of revenue. High R&D spending reduces current profit but may build future growth. Cutting R&D can boost short-term profits while weakening a company's long-term competitiveness.