Merck spends $4.8 billion during the current year on research to identify, develop, and test new drugs to combat diseases and illnesses. This example differs in that Merck (1) incurs the costs internally, and (2) does not acquire a completed asset. Merck would not engage in research if it did not expect future benefits. U.S. GAAP requires firms to expense research and development (R&D) costs in the period incurred. This requirement rests on reasoning that the costs do not satisfy the second criterion for asset recognition because the firm cannot measure the expected future benefits with sufficient reliability. 4 The difficulty is identifying the portion of each year’s expenditure that leads to future benefits and the portion that does not. Thus, Merck recognizes the $4.8 billion as an expense of the current year.
International Accounting Standard No. 38 treats research costs the same as U.S. GAAP but treats development costs as assets.5 when a research project reaches the stage of technical feasibility and the firm intends to continue developing the technology for ultimate use or sale, the research project moves from the research phase to the development phase. Thus, under IFRS, reliable measurement of the cost of future benefits commences at the development phase. A later section illustrates the difference in accounting for development costs under U.S. GAAP and IFRS.