R&D Accounting under Indian GAAP (AS 8/AS 26) and Ind AS 38

Accounting for Research & Development under Indian GAAP (AS 8/AS 26) and Ind AS 38: Concepts, Judgments, and Practice

Executive Summary

Research and Development (R&D) drives sustainable competitive advantage across sectors in India—from pharmaceuticals and life sciences to automotive, technology, defence, and financial services. Accounting for R&D is, however, far more than a mechanical application of standards: it requires rigorous judgment about when to expense, when to capitalize, how to estimate useful lives and impairment, and how to craft transparent disclosures that faithfully represent the economics of innovation. This article provides an expert-level, practice-oriented guide that traverses Indian GAAP and Ind AS requirements, reconciles legacy Accounting Standard 8 (AS 8) with its successor literature, and illustrates complexities with numeric examples and corporate-style case studies relevant to qualified chartered accountants.

Historically, AS 8 dealt with “Accounting for Research and Development.” With the issuance of AS 26 “Intangible Assets,” AS 8 was withdrawn and its guidance substantially subsumed in AS 26. Under Ind AS, which converges with IFRS, the applicable standard is Ind AS 38 “Intangible Assets.” Across these frameworks, the core policy spine is consistent: research expenditure is recognized in profit or loss as incurred; development expenditure may be capitalized only when stringent recognition criteria are demonstrably met. The practical challenges lie in evidencing the transition point from research to development, documenting feasibility and commercial viability, allocating costs precisely, and monitoring impairment signals in a timely manner.

For bankers, investors, and preparers alike, R&D accounting has direct consequences for reported profitability (expense vs capitalization), balance sheet strength (intangible asset recognition and impairment), and performance metrics (EBITDA, ROCE, and free cash flow). This paper distils fundamental concepts, compares Indian GAAP and Ind AS, and provides illustrations that can be directly embedded into audit workpapers, accounting manuals, and board papers.

1. Framework Overview and Standard Linkages

1.1 Legacy Indian GAAP: AS 8 and AS 26

• AS 8 historically covered accounting for research and development activities. With the introduction of AS 26 “Intangible Assets,” AS 8 was withdrawn. AS 26 sets out recognition, measurement, amortization, and impairment guidance for intangible assets, including development-phase expenditures.
• Under AS 26, research costs are expensed as incurred. Development costs can be recognized as an intangible asset if—and only if—the entity demonstrates all recognition criteria such as technical feasibility, intention and ability to complete, ability to use or sell, probable future economic benefits, availability of adequate resources, and reliable measurement of costs.

1.2 Ind AS: Ind AS 38 and its IFRS lineage

• Ind AS 38 mirrors IAS 38 in substance. Research expenditure is expensed. Development expenditure is capitalized when strict criteria are satisfied and the asset is ready for its intended use or sale.
• Related standards often implicated:

– Ind AS 36 (Impairment of Assets): subsequent impairment testing and recognition of losses/reversals.

– Ind AS 23 (Borrowing Costs): capitalization of eligible borrowing costs for qualifying assets under development.

– Ind AS 20 (Government Grants): grants related to R&D are recognized either as income over periods in which related costs are expensed or deducted from the carrying amount of the asset, subject to policy consistency.

– Ind AS 115 (Revenue from Contracts with Customers): development arrangements with customers, licensing of technology, and milestone payments.

– Ind AS 116 (Leases): R&D facility leases and right‑of‑use assets affecting cost allocations.

– Ind AS 109/107 (Financial Instruments): measurement and disclosure for contingent or milestone‑linked consideration receivable/payable in R&D collaborations.

1.3 Substance over Form, Accrual Basis, and Prudence

• The embedded conceptual foundations include accrual basis, matching, prudence (cautious recognition without creating hidden reserves), relevance and reliability of information, and substance over form. These principles frame judgments such as deferring costs only when future benefits are probable and can be measured reliably.

2. Definitions and Boundary Lines: Research vs Development

2.1 Research

• Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
• Typical activities: basic research, alternative material evaluation, exploratory laboratory work, assessing research alternatives, search for applications without established technical feasibility.
• Accounting: Expense as incurred; no capitalization is permitted because future economic benefits cannot be demonstrated at this stage.

2.2 Development

• Application of research findings or other knowledge to a plan or design for the production of new or substantially improved products, processes, systems, or services before the start of commercial production or use.
• Examples: designing prototypes, pilot plants, model tooling, coding of functional software modules post‑feasibility, regulatory trials at a stage where the product candidate is commercially feasible and likely to be approved.

• Accounting: Capitalization permitted only upon satisfying all recognition criteria. Costs prior to the capitalization date are expensed; costs after that date that meet the criteria are included in the intangible asset’s cost.

3. Recognition Criteria for Development Costs (AS 26 / Ind AS 38)

An entity recognizes a development‑phase intangible asset when it can demonstrate all of the following:

1) Technical feasibility of completing the intangible asset so that it will be available for use or sale.

2) Intention to complete and to use or sell the asset (e.g., approved project plan, board approval).

3) Ability to use or sell the asset (e.g., existing distribution channels, internal integration roadmap).

4) Probable future economic benefits (evidence via market assessments, signed offtake agreements, positive NPV, or internal use benefits clearly exceeding costs).

5) Availability of adequate technical, financial, and other resources to complete the development and to use or sell it (e.g., staffing plans, committed financing, manufacturing readiness).

6) Ability to measure reliably the expenditure attributable to the asset during its development (robust cost accumulation process, WBS, time writing, and vendor cost segregation).

Key practice pointer: The documentation “file” that evidences these criteria should be contemporaneous—board decks, feasibility studies, regulatory interactions, program charters, and detailed cost trackers—so that auditors can verify the transition point and attribution of costs.

4. Measurement on Initial Recognition

4.1 Cost Components Included

• Direct costs: payroll of technical staff directly assigned to the project; materials, prototypes, testing; directly attributable overheads (e.g., specialized software licenses).
• Services: design, engineering, clinical trial services (for qualifying phases), external development partners’ fees.
• Borrowing costs: if the development qualifies as a “qualifying asset” under Ind AS 23 (substantial period to get ready for its intended use or sale), capitalize eligible borrowing costs from the date capitalization criteria are met and development activities are in progress.
•  Government grants: when grants relate to the asset, policy choices exist (recognize as deferred income and amortize to P&L over the asset’s life; or deduct the grant from the asset’s carrying amount). Apply consistently and disclose.

4.2 Costs Excluded

• Selling, general marketing (market research) and customer training costs.
• Initial operating losses after the asset is ready for use.
• Inefficiency and abnormal waste.
• Research‑phase costs (even if incurred shortly before feasibility is established).

4.3 Capitalization Start, Suspension, and Cessation

• Start: when recognition criteria are first met.
• Suspend: if active development is interrupted other than temporarily; borrowing costs capitalization also pauses.
• Cease: when the asset is substantially ready for use or sale (e.g., code freeze for software; regulatory approval for a drug; production tool validated for automotive component). Costs thereafter generally expensed unless they add future benefits (enhancements).

5. Subsequent Measurement: Amortization, Useful Life, and Impairment

5.1 Useful Life

• Finite life: amortize over the asset’s useful life reflecting the pattern of benefit; when the pattern cannot be determined reliably, use straight‑line.
• Indefinite life: rare for R&D outputs; not amortized but tested annually for impairment under Ind AS 36. Periodic reassessment is mandatory; if the life becomes finite, start amortization.

5.2 Amortization and Residual Value

• Residual value is often zero for intangibles unless there is a committed third‑party purchase or an active market.
• Start amortization when the asset is available for use, not when it generates revenue.
• Methods: straight‑line is predominant; sum‑of‑the‑years‑digits or usage‑based methods may be used if they best reflect consumption of benefits.

5.3 Impairment Testing

• Indicators based: under AS 26, indicators trigger recoverable amount testing (value‑in‑use vs fair value less costs of disposal).
• Under Ind AS 36, additional requirements apply: annual tests for indefinite‑life intangibles and intangibles not yet available for use; allocation to cash‑generating units (CGUs); consideration of pre‑tax discount rates and explicit cash flow projections.
• Reversals: permitted under Ind AS when estimates change (except goodwill); not permitted under some legacy frameworks. Maintain careful audit trail for reversals.

6. Disclosures

Disclosures should enable users to evaluate the nature, timing, and uncertainty of R&D outflows and resulting assets. Key disclosures:

• For research expenditure: the amount expensed during the period.
• For development assets: reconciliation of carrying amounts, additions, disposals, amortization, impairment losses/reversals, useful lives or amortization rates, and methods.
• Significant judgments: capitalization criteria, technical feasibility evidence, assessment of useful lives, CGU allocations, key assumptions in impairment tests (growth rates, discount rates, approval probabilities in pharma, etc.).
• Government assistance: accounting policy and amounts recognized.
• Borrowing costs: policy and amounts capitalized.
• For internally generated intangibles, indicate restrictions on title or pledged assets, if any.

7. Numeric Illustrations

Illustration 1: Software Development Project

A bank’s technology subsidiary undertakes a core‑banking platform rewrite. Total project spans 24 months. For the first 8 months, the team explores alternative architectures and builds proof‑of‑concepts. At month 9, the board approves a detailed design with a clear project plan, budget, and milestones; technical feasibility is documented; skilled resources and financing are committed; and cost capture processes are in place.

• Months 1–8 (Research): ₹12 crore incurred → Expense as incurred.
• Month 9 onwards (Development): Direct payroll (₹20 crore), vendor costs (₹15 crore), prototype infrastructure (₹3 crore), and directly attributable overheads (₹2 crore) qualify. Abnormal rework of ₹1 crore is excluded and expensed.
• Borrowing costs: A specific project loan at 9% supports the development phase from month 9 to month 24 with average accumulated expenditures of ₹20 crore. Eligible borrowing costs capitalized ≈ ₹1.8 crore (simplified).

Result: Intangible asset cost at completion ≈ ₹20 + ₹15 + ₹3 + ₹2 + ₹1.8 − ₹1 (excluded abnormal) = ₹40.8 crore. Amortize over, say, 7 years from the date the platform is available for use.

Illustration 2: Pharmaceutical Product Candidate

A life‑sciences entity progresses from discovery to clinical phases. Early discovery and pre‑clinical work are treated as research. Upon successful Phase II with strong efficacy signals and a clear regulatory pathway, the company documents feasibility, commercial intent, funding, and reliable cost tracking. From that date, Phase III trial costs, manufacturing scale‑up validation, and regulatory dossier preparation are capitalized as a development intangible (subject to jurisdiction‑specific regulatory nuances). If approval is obtained two years later, amortization begins over the product’s patent‑protected economic life. Any adverse safety signal or commercial failure triggers impairment testing; if recoverable amount is lower than carrying amount, an impairment loss is recognized.

Illustration 3: Automotive Engineering Program

An automotive OEM invests in a next‑gen powertrain. Feasibility is established when prototype performance meets defined thresholds and industrialization plans are approved. Tooling design and validation for serial production are capitalized; pre‑feasibility explorations and unsuccessful prototypes are expensed. If a change in emissions regulation renders the program non‑viable, the CGU’s recoverable amount may fall below carrying amounts; impairment is recognized, with clear disclosure of key assumptions (regulatory timing, expected volumes, discount rate).

8. Corporate‑Style Case Studies (Anonymized Indian Context)

Case Study A — PharmaCo Ltd. (Modeled on large Indian pharma practices)

Background: PharmaCo maintains a multi‑asset pipeline across oncology and anti‑infectives. Historically, it expensed nearly all R&D until late‑stage development. In FY X, one oncology molecule reached late Phase II with strong efficacy endpoints.

Judgments and Policy: The company’s accounting manual defines clear gates (R1 to D3). Transition to “D1—Development” requires: (i) technical feasibility evidenced by positive clinical data and KOL review; (ii) board‑approved plan and funding; (iii) probability‑weighted commercial forecast>hurdle; (iv) reliable cost capture through project codes.

Accounting Outcome: From gate D1, PharmaCo capitalized Phase III trial costs, scale‑up batches, and dossier costs; continuing discovery on related back‑ups remained expensed. A regulator’s request for an additional safety study delayed launch by 9 months; capitalization continued because development was active. On approval, amortization began over 8 years aligned to expected market exclusivity. Subsequent impairment testing considered competition and price‑control risks; a partial impairment was recognized when a competitor launched a superior therapy.

Key Takeaway: Gate‑based governance is essential; impairment triggers in pharma can be abrupt and exogenous.

Case Study B — AutoTech India Pvt. Ltd.

Background: AutoTech develops an EV drivetrain. Early architectural studies and motor topology research were expensed. After validating a prototype meeting range and durability KPIs, management approved industrialization.

Accounting Outcome: Development costs (CAE simulations linked to the approved design, tooling validation, software calibration for the approved control stack, homologation testing) were capitalized. Marketing pilots and dealer training were expensed. A customer‑specific customization funded by the OEM’s customer was treated under Ind AS 115; the upfront non‑refundable engineering fee was recognized over the period of performance, while the internally retained platform development costs continued to be capitalized as an intangible.

Key Takeaway: Carefully separate customer‑funded engineering services (revenue contracts) from internally generated platform intangibles.

Case Study C — FinServe Bank (Core Platform Modernization)

Background: FinServe embarked on a cloud‑native core transformation. For the first 6 months, competing architectures and vendors were evaluated; these costs were expensed. Post selection, the bank built a detailed product backlog and committed squads.

Accounting Outcome: From the capitalization date, internally developed modules (ledger, payments engine) were capitalized; non‑separable implementation services embedded in SaaS arrangements were expensed. Borrowing costs were capitalized for the self‑developed modules only. The bank also received a state incentive for establishing an R&D centre; it opted to recognize the grant as deferred income, amortized over the assets’ useful lives to match amortization expense.

Key Takeaway: Cloud/SaaS arrangements require granular scoping; not all implementation costs meet capitalization criteria.

Case Study D — ChemSpecialty Ltd. (Process Innovation)

Background: The company sought to reduce batch time by 25% through process redesign. Early lab trials were research. Once a scaled pilot proved feasible and a capex plan was approved, development commenced.

Accounting Outcome: Pilot plant design refinement, specialized tooling and control algorithms were capitalized; abnormal scrap and failed pilot batches were expensed. A sudden feedstock ban required reformulation; the original development asset’s recoverable amount dropped, leading to impairment. A new development project began with a fresh capitalization gate.

Key Takeaway: Regulatory shocks can bifurcate projects into impaired legacy assets and new development projects; maintain separate cost ledgers to avoid cross‑contamination.

9. Special Topics and Common Pitfalls

9.1 Start‑Up and FinTech Software

• Distinguish research (idea validation, prototype spikes) from development (feature‑complete product build). Agile does not preclude capitalization; however, sprint artifacts must tie costs to features meeting technical feasibility and commercialization intent.
• Cloud configuration and customization: many configuration/implementation costs do not create a separable intangible controlled by the entity; expense unless the entity controls the resulting software code and future benefits.

9.2 Pharmaceutical Regulatory Nuances

• Capitalization generally only after technical feasibility with a reasonable path to approval. Country‑by‑country approvals may stagger amortization start dates if markets are significant CGUs.
• Milestone payments to licensors: allocate between intangible asset cost and expense depending on whether milestones relate to obtaining/defending control of the underlying IP vs variable payments linked to sales (which may be accounted for as royalties).

9.3 Automotive Tooling and Customer Engineering

• Tooling developed for a specific OEM that will be sold to the OEM is inventory or a contract asset, not an intangible. Internally retained platform tooling may be intangible or PP&E depending on use. Carefully read legal title and control clauses.
• Customer‑specific engineering services may fall under Ind AS 115; recognize revenue over time if performance creates or enhances an asset that the customer controls.

9.4 Government Grants and Incentives

• Under Ind AS 20, presentation choices must be consistent: either set off against asset cost or present as deferred income. Disclose the policy and the nature/extent of assistance.
• R&D tax credits (where available) are presented based on substance—often as a reduction of the related expense or as other income; ensure no double counting with grants.

9.5 Borrowing Costs

• Capitalize only for qualifying assets and only during active development. General borrowings capitalization requires a capitalization rate applied to average accumulated expenditures, with careful exclusion of periods of suspension.

9.6 Impairment Triggers

• External: adverse regulatory decisions, disruptive competitor launches, macro shocks, price‑control regimes..
• Internal: cost overruns, missed technical milestones, change in strategic intent, persistent negative variances against forecast.
• Document triggers and management’s response (recoverable amount model, sensitivity analyses).

9.7 Internal Controls and Governance

• Gate approvals, capitalization memos, project codes, time writing, and procurement controls are crucial to ensure reliable cost attribution.
• Quarterly impairment screening and annual deep dives for significant development intangibles.
• Audit Committee reporting: summarize major capitalization decisions, impairment results, and sensitivities.

9.8 Transition and Differences between Frameworks.

• Entities still reporting under Accounting Standards (AS) apply AS 26; those under Ind AS apply Ind AS 38 with Ind AS 36 for impairment. Differences are mainly in disclosure depth and impairment mechanics rather than the core research‑vs‑development distinction.

10. Detailed Numerical Case Study

Background

TechNova Ltd., an India‑based technology manufacturer, initiated Project “Astra” to develop a new embedded operating system for industrial IoT devices. The program spans 30 months.

Timeline and Costs

• Months 1–6: Research — exploring kernel architectures; evaluating microcontroller families; prototype spikes. Costs: ₹9 crore (payroll ₹5, external consultants ₹2, labs ₹2) → Expense.
• Month 7: Technical feasibility established; Board approves development plan with committed funding of ₹60 crore. From Month 7 to Month 24, development costs are tracked by work package.
• Months 7–24: Development — payroll ₹24 crore; vendor coding ₹18 crore; specialized tooling/licenses ₹4 crore; prototype hardware for validation ₹2 crore; directly attributable overheads ₹3 crore; abnormal rework due to design error ₹1.2 crore (expense). Borrowing costs: general borrowings with capitalization rate 8% on average accumulated development expenditures (₹20 crore) for 18 months → ₹2.4 crore capitalized.
• Month 25: Beta release; Month 26–30: hardening and customer pilots (still development). Available for use at Month 30.

Capitalized Cost Calculation

Included: 24 + 18 + 4 + 2 + 3 + 2.4 = ₹53.4 crore
Excluded (expensed): Research ₹9 crore; abnormal rework ₹1.2 crore

Amortization

Useful life estimated at 6 years, straight‑line. Annual amortization = ₹53.4 ÷ 6 ≈ ₹8.9 crore, commencing Month 30.

Impairment Scenario (Year 3 post‑launch)

A competing platform erodes pricing. CGU recoverable amount (VIU) estimated at ₹30 crore vs carrying amount of ₹35.6 crore → impairment of ₹5.6 crore recognized. Discount rate, terminal growth, and sensitivity are disclosed. If subsequent releases restore demand and VIU rises to ₹34 crore, a partial reversal of ₹3.4 crore may be recognized under Ind AS (subject to not exceeding the carrying amount that would have existed without impairment).

Presentation and Metrics

• EBITDA impact: capitalization improves EBITDA during development; amortization impacts post‑launch. Disclose the effect transparently to avoid misinterpretation by users of financial statements.
• Cash flow: no change in cash economics; classification shifts between investing (capitalized) and operating (expensed) segments in certain analyses.

11. FAQs and Judgment Calls for Audit Files

Q1: Can we capitalize “proof‑of‑concept” costs?

Generally no; POCs are research unless they occur after feasibility is established and are directly attributable to completing the asset for its intended use.

Q2: In agile development, is every sprint expensed?

No. Agile is a delivery method. Costs incurred after capitalization criteria are met and that contribute to getting the product ready for use/sale can be capitalized; bug‑fixing post‑availability is expensed.

Q3: Can regulatory filing fees be capitalized in pharma?

If directly attributable to preparing the asset for its intended use (e.g., dossier submission integral to approval), yes; otherwise expense.

Q4: When does amortization start if market launch is staggered across countries?

Amortization starts when the asset is available for use in the relevant CGU. If markets constitute separate CGUs, availability dates may differ.

Q5: Can we recognize an intangible for internally generated brands or customer lists?

Typically no under Ind AS 38; internally generated brands, mastheads, publishing titles, customer lists are prohibited from recognition.

Q6: How to treat grant income relating to development

Either deduct from the asset’s cost or recognize as deferred income amortized over the asset’s useful life, applied consistently and disclosed.

Q7: What about website development costs?

Planning stage is research (expense). Application development stage post‑feasibility can be capitalized if criteria are met. Content population and training are expensed.

12. Practical Implementation Roadmap

1) Policy and Governance

• Issue an R&D accounting policy harmonized with AS 26/Ind AS 38 and cross‑referencing Ind AS 36, 20, and 23.
• Define gates and documentation templates (feasibility memo, capitalization memo, impairment memo).
• Establish capitalization committee oversight (Finance, R&D, Legal, Strategy).

2) Systems and Cost Capture

• Project codes and WBS aligned to capitalization gates.
• Time writing for engineers; vendor SOWs that segregate capitalizable vs non‑capitalizable tasks.
• Borrowing cost engine for qualifying assets; monthly capitalization reports.

3) Disclosures and External Communication

• Enhance MD&A with R&D strategy, spend mix, and outcomes.
• Provide sensitivity analyses for impairment tests of major development intangibles.

4) Audit Readiness

Maintain contemporaneous evidence for criteria.

Quarterly review of triggers and asset lives.

Training for project managers on documentation expectations.

13. Conclusion

Accounting for R&D in India—whether under AS 26 or Ind AS 38—demands disciplined judgment rooted in fundamental concepts: prudence, matching, accrual, and substance over form. The bright‑line rule that research is expensed and development is capitalized only when demanding criteria are met is easy to state but hard to apply. The line between research and development is a governance choice as much as an accounting one; it must be supported by robust evidence and monitored for impairment with equal rigor. By institutionalizing gate‑based controls, precise cost capture, and transparent disclosure, entities can faithfully depict the economics of innovation while meeting the expectations of auditors, investors, lenders, and regulators.

This article has set out the conceptual foundations, recognition mechanics, measurement rules, impairment protocols, and disclosure requirements, punctuated by numeric illustrations and Indian corporate‑style case studies. The goal is to help qualified chartered accountants design and audit R&D policies that are robust, defensible, and aligned to the evolving demands of markets and stakeholders. Implemented well, R&D accounting becomes not merely a compliance exercise but a strategic enabler—translating laboratories and code repositories into financial statements that communicate value creation with clarity.