Capitalising development costs under FRS 102

Under FRS 102 research is always expensed, but development spending can be capitalised as an intangible asset once the business can demonstrate all six conditions in paragraph 18.8H, including technical feasibility, intention, resources and a reliable measure of cost. Capitalising is a policy choice: a business may expense all development, but if it chooses to capitalise it must do so for every project that meets the conditions. Micro entities under FRS 105 cannot capitalise development at all.

Where does research end and development begin?

The FRS 102 glossary defines research as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development is the application of research findings or other knowledge to a plan or design for new or substantially improved materials, devices, products, processes, systems or services before commercial production or use starts.

Paragraph 18.8A requires each internal project to be split into a research phase and a development phase. Paragraph 18.8E says nothing arising from research may be recognised as an asset, because at that stage the business cannot show an asset exists that will generate probable benefits (18.8F). If the two phases cannot be told apart, paragraph 18.8B treats the whole project as research.

Research phase examples (18.8G)	Development phase examples (18.8J)
Activities aimed at obtaining new knowledge	Designing, building and testing pre production or pre use prototypes and models
Searching for, evaluating and selecting applications of research findings	Designing tools, jigs, moulds and dies involving new technology
Searching for alternative materials, devices, products, processes, systems or services	Designing, building and running a pilot plant not of a scale economically feasible for commercial production
Formulating, designing, evaluating and selecting possible alternatives	Designing, building and testing a chosen alternative

The accounting meaning is not the whole test for R&D tax relief. The DSIT Guidelines (2023), at CIRD81910, start from the accounting definition but say R&D for tax purposes takes place when a project seeks an advance in science or technology. How costs are treated in the accounts does not decide whether they qualify; see R&D tax relief explained.

What are the six conditions for capitalising?

Paragraph 18.8H allows an intangible asset to be recognised from development if, and only if, the business can demonstrate all of the following:

1. Technical feasibility of completing the asset so it will be available for use or sale. Evidence might be a working prototype or successful testing.
2. Intention to complete the asset and use or sell it, typically shown by board minutes or an approved project plan.
3. Ability to use or sell it.
4. How it will generate probable future economic benefits, for example by showing a market for its output or for the asset itself, or, if it is for internal use, its usefulness.
5. Adequate technical, financial and other resources to complete it and use or sell it, such as a business plan and funding in place.
6. Reliable measurement of the expenditure attributable to the asset during development, which in practice needs project level time recording and cost codes.

Each condition must be met at the time, not with hindsight. Paragraph 18.6 requires judgement on the evidence available at initial recognition, giving greater weight to external evidence.

Is capitalisation compulsory once the conditions are met?

No. Paragraph 18.8K describes capitalisation as a policy the entity adopts. If it adopts that policy, the policy must be applied consistently to all expenditure meeting paragraph 18.8H, and expenditure not meeting it is expensed. A business can therefore choose to expense all development spending, which is simpler and avoids later impairment questions, or capitalise, which spreads the cost over the periods that benefit.

What a business cannot do is pick and choose project by project, for example capitalising only in a weak year to support profit. Changing the policy later is a change of accounting policy under Section 10 and is allowed only if it gives reliable and more relevant information (paragraph 10.8); see accounting policies, estimates and errors.

Micro entities have no choice. FRS 105 paragraph 13.4 says an internally generated intangible shall not be recognised as an asset, and paragraph 13.5(a) lists research and development expenditure among items to be expensed.

Which costs go into the asset?

Paragraph 18.10A says cost is the expenditure incurred from the date the asset first meets the recognition criteria. Spending before that date stays expensed, and paragraph 18.17 prevents it being added back later. Paragraph 18.10B allows all directly attributable costs needed to create, produce and prepare the asset, for example:

• materials and services used in generating the asset;
• employee benefit costs arising from generating it, such as salaries of developers working on the project;
• fees to register a legal right, such as a patent;
• amortisation of patents and licences used to generate it.

Interest can be included only under the borrowing costs rules in Section 25. General overheads that cannot be traced to the project fall outside paragraph 18.10B, and training is listed for expensing in paragraph 18.8C.

How does this work on a real project?

Illustration only. A company spends £40,000 a month developing a new product over a year to 31 December. From January to April it tests alternative designs. In May it completes a working prototype, the board approves the full build with funding in place, and time recording by project starts. All six conditions are met from 1 May. The product goes on sale on 1 January the following year and is expected to sell for five years.

Period	Spend £	Treatment
January to April	160,000	Expensed; research phase or conditions not yet met
May to December	320,000	Capitalised as development cost
Following five years	64,000 a year	Amortisation from 1 January, straight line

The £160,000 cannot be capitalised later even though the product succeeded. Under paragraph 18.29 the company discloses the research and development expensed in the year, and the £320,000 appears as an addition from internal development in the reconciliation required by paragraph 18.27(e).

How is the asset amortised and tested?

Amortisation begins when the asset is available for use (paragraph 18.22), not when spending starts. Its life is finite (18.19) and cannot exceed 10 years where, exceptionally, no reliable estimate can be made (18.20). Company law adds a note: under Schedule 1 paragraph 21(2) of the 2008 accounts regulations, a company carrying development costs must state in its accounting policies the period over which they are being written off and the reasons for capitalising them.

Paragraph 18.25 applies Section 27. Paragraph 27.7 requires a check for indications of impairment at each reporting date, so a stalled project or a weaker market for the product needs a recoverable amount estimate rather than continued capitalisation. Once the asset is in use, its life is reviewed when indicators suggest it has changed (18.24). The general rules on intangibles are in FRS 102 Section 18: intangible assets.

Does capitalising development costs boost distributable profits?

Usually not. Section 844 of the Companies Act 2006 says that where development costs are shown as an asset, the amount is treated as a realised loss when working out profits available for distribution under section 830. The exception in section 844(3) applies only if there are special circumstances justifying the directors in deciding otherwise, and the note explaining the reasons for capitalising states that the amount is not treated as a realised loss and explains those circumstances. Capitalising therefore improves reported profit but, without that disclosure, does not increase the amount that can be paid as dividends.

How does tax treat capitalised development?

Capitalising in the accounts does not turn revenue spending into capital for tax. HMRC’s manual at CIRD25160 notes that, for corporation tax, revenue expenditure on R&D will normally be deductible when it is written off in the accounts, and that R&D expenditure is excluded from the debit rules of the intangible assets regime. Section 1308 of the Corporation Tax Act 2009 confirms that revenue R&D expenditure is not prevented from being deducted just because it is brought into account in valuing an intangible asset, including for R&D relief purposes, and section 1308(5) blocks a second deduction for the amortisation of the same expenditure. CIRD25160 also points to separate allowances for capital expenditure on R&D. Getting this wrong can double count or lose relief, so the tax computation needs a schedule linking capitalised costs to the deductions claimed.

What mistakes come up most often?

• Capitalising from the start of a project rather than the date all six conditions were met.
• Capitalising some qualifying projects and expensing others, contrary to paragraph 18.8K.
• Including general overheads or training in the cost.
• Starting amortisation late, or never testing a stalled project for impairment.
• Assuming capitalised costs are distributable without the section 844 note.
• Claiming a deduction both when the spending is incurred and again as amortisation.

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Related Accountapedia entries

• Accounting for website and software development costs
• Can start up costs be capitalised
• Can I capitalise staff time on fixed assets
• FRS 102 Section 25: borrowing costs
• FRS 102 explained
• FRS 105 and development costs

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• Financial Reporting Council: FRS 105 September 2024
• legislation.gov.uk: SI 2008/410, schedule 1
• GOV.UK: Manual page CIRD81910
• legislation.gov.uk: Act 2006 c. 46, section 844
• GOV.UK: Manual page CIRD25160
• legislation.gov.uk: Act 2009 c. 4, section 1308

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.