A medical device company is developing a new implant. During the year it buys a general-purpose lab centrifuge for $300,000 that will be used on this project but can also be redeployed afterward to other future R&D projects and to routine quality-control testing once this project ends, so it has an alternative future use beyond this one project. The company separately pays $180,000 in salaries to bench scientists working directly on the implant project. Under ASC 730, how should the company account for the $300,000 centrifuge cost and the $180,000 of scientist salaries?
- Capitalize both the centrifuge and the salaries as intangible research and development assets, amortizing each over the expected life of the implant project once the project reaches technological feasibility
- Expense both the centrifuge's full cost and the salaries immediately as research and development expense, because ASC 730 requires all costs directly identified with a specific research and development project to be expensed when incurred regardless of an asset's future usefulness
- Capitalize the $300,000 centrifuge as a tangible asset and depreciate it over its useful life, charging the depreciation to research and development expense as the centrifuge is used, because it has an alternative future use beyond this project, while expensing the $180,000 of scientist salaries as research and development expense as incurred
- Expense the $300,000 centrifuge immediately because specialized research equipment can never be capitalized under US GAAP, but capitalize the $180,000 of salaries as a prepaid research and development asset until the project reaches technological feasibility
Why C? And why not the others?
Correct answer: C. Capitalize the $300,000 centrifuge as a tangible asset and depreciate it over its useful life, charging the depreciation to research and development expense as the centrifuge is used, because it has an alternative future use beyond this project, while expensing the $180,000 of scientist salaries as research and development expense as incurred
ASC 730-10-25-2 provides that materials, equipment, and facilities used in research and development activities are charged to expense when acquired unless they have an alternative future use, in which case they are capitalized as tangible assets and their cost is allocated to expense (as depreciation) over the periods the assets are used, with that depreciation itself treated as a research and development cost. Because the centrifuge here can be redeployed to future projects and routine testing after this project ends, it has an alternative future use and must be capitalized and depreciated rather than expensed in full. Personnel costs such as scientist salaries directly engaged in research and development, by contrast, have no such capitalization exception and are always expensed as incurred. The option capitalizing both items as amortizable intangible assets misapplies an internal-use or externally-marketed software framework that has no bearing on tangible lab equipment or labor costs under ASC 730. The option expensing both amounts in full ignores the specific statutory exception for tangible items with an alternative future use, which exists precisely to prevent expensing an asset that will keep generating value beyond the current project. The option reversing the treatment, expensing the equipment while capitalizing the salaries as a prepaid asset, inverts the rule entirely: it is tangible items with alternative future use that qualify for capitalization, never labor costs, which are never capitalized as research and development assets regardless of any future use argument.
Source: FASB ASC 730-10-25-2 (elements of research and development costs; capitalization of materials, equipment, and facilities with alternative future use)