R&D costs are investments in a company or nation’s future. Pharmaceutical and technology companies tend to spend more, while governments use R&D to improve living standards, space programs, national security, and policies. Accounting standards for R&D costs differ worldwide.
Research and development (R&D) costs are investments in the future of a company or an entire nation. Together, these two segments of the economy – society and government – account for the majority of research and development advances worldwide. Pharmaceutical and technology companies typically allocate a percentage of their profits to R&D costs. These funds are used to develop and update products and services. A government applies research and development to improvements in living standards, space programs, national security, and government policies, and the costs depend on the economic growth in the country.
Most companies spend a tiny percentage of their profits on R&D costs, but pharmaceutical and technology companies tend to spend more. In pharmacies, it often takes many years and a large amount of money to bring a single new drug to market, and still there are no guarantees that a drug will be approved by regulators. Additionally, patent protection on blockbuster drugs runs out, allowing rivals to create generic versions of the same drug. In order to continually develop new drugs, pharmaceutical companies employ thousands of people and spend large sums of money each year on research and development.
Technology developed by software and semiconductor companies becomes obsolete faster than in most other industries, making the technology a giant in R&D spending. Because the technology can be universally adopted, technology companies sometimes outsource R&D to other countries to save costs. China and India have highly developed technology industries. It is cheaper for some US-based global technology companies to outsource R&D, especially to India, which requires lower wages than China.
Governments spend money on research and development to improve social welfare in a nation. In the United States, major contractors hired by the Department of Defense spend billions of US dollars each year on defense procurement. These contractors are allowed to report reasonable research and development costs as indirect expenses and then recover a large percentage of those costs.
Depending on the accounting standard a country adheres to, research and development costs are accounted for differently around the world. In the United States, where generally accepted accounting standards (GAAP) are the norm, any reasonable costs associated with research and development are accounted for as an expense when incurred. The standards for countries using International Financial Reporting Standards (IFRS) are more stringent. Companies based in countries that use IFRS cannot report an intangible asset, such as a software license, as an R&D expense unless certain criteria are met.
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