The Importance of Research and Development in Intangible Assets

The Importance of Research and Development in Intangible Assets

Intangible assets play a crucial role in the success of businesses across various industries. However, it is essential to understand the requirements and considerations associated with recognizing and developing these assets. In this article, we will delve into the concepts of research, development, and acquisition of intangible assets, and explore their significance in driving future economic benefits.

Research and development form the foundation for the creation of intangible assets. According to accounting standards, any intangible asset resulting from research (or the internal research phase of a project) should not be recognized. Instead, expenses incurred during research should be recognized as expenditures. Examples of research activities include obtaining new knowledge, evaluating and selecting applications for research outcomes, exploring alternatives for materials, products, processes, and systems, and formulating, designing, evaluating, and selecting possible alternatives for new or improved assets.

On the other hand, the recognition of intangible assets resulting from development (or the internal development phase of a project) is contingent upon several factors. A company must demonstrate the technical feasibility to complete the intangible asset and make it available for use or sale, the intention to complete and utilize or sell the asset, the capacity to use or sell the asset, and how the asset is expected to generate future economic benefits. Additionally, the entity must prove the existence of a market for the product or the intangible asset itself, or its usefulness for internal use. Adequate technical, financial, and other resources must also be available to complete the development and utilize or sell the intangible asset. Lastly, reliable measurement of costs incurred during the asset's development is essential.

During the internal development phase of a project, there may be cases where an intangible asset can be identified and probable future economic benefits can be demonstrated. This is because the development phase is more advanced than the research phase. Activities such as designing and testing prototypes, creating tools and molds involving new technology, operating pilot factories, and testing selected alternatives for new or improved materials, devices, products, processes, systems, and services are examples of development activities.

When acquiring intangible assets separately, the cost includes the purchase price, import taxes, and non-recoverable taxes, after deducting commercial discounts and rebates. Additionally, any costs directly related to preparing the asset for its intended purpose should be included.

It is evident that both research and development are crucial for the creation and recognition of intangible assets. These assets contribute significantly to a company's competitive advantage and future economic success. To effectively harness the benefits of research and development, here are three actionable pieces of advice:

• 1. Foster a culture of innovation: Encourage and support research and development initiatives within your organization. Promote creativity, experimentation, and collaboration among employees to generate new ideas and solutions.

• 2. Invest in technology and expertise: Allocate resources to acquire the necessary technological tools and expertise to facilitate efficient research and development processes. Stay up-to-date with industry trends and advancements to ensure your efforts remain relevant and competitive.

• 3. Continuously evaluate and refine strategies: Regularly assess the effectiveness of your research and development strategies. Monitor market trends, customer demands, and industry changes to adapt and refine your approach accordingly. Embrace a mindset of continuous improvement.

In conclusion, understanding the requirements and considerations associated with research, development, and acquisition of intangible assets is crucial for businesses aiming to leverage these assets for future success. By fostering innovation, investing in technology and expertise, and continuously evaluating and refining strategies, companies can effectively capitalize on the benefits offered by intangible assets.