R&D spending has no single definition that works for every purpose. A company’s financial statements, a government’s R&D statistics and a tax-credit calculation can each count different costs. To understand or compare a reported figure, first identify its framework, what it includes and whether costs are expensed or capitalized.
What counts as research and development?
For statistical purposes, the OECD Frascati framework identifies R&D by five characteristics: it is novel, creative, uncertain, systematic, and transferable or reproducible. The criteria help distinguish research and development from routine activity, but they do not replace the accounting rules a company must follow. The U.S. National Center for Science and Engineering Statistics (NCSES) explains the statistical framework and how reported business records may be transformed to fit it in its 2025 annotated compilation.
- Novel: The work seeks new knowledge or a new result rather than simply repeating established practice.
- Creative: It relies on original concepts or approaches.
- Uncertain: The outcome, method or resources needed are not known in advance.
- Systematic: The work is planned and carried out in an organized way.
- Transferable or reproducible: The knowledge or result can be shared or replicated.
These criteria are useful for understanding what statistical agencies mean by R&D. A company’s financial reporting may classify costs differently under its accounting framework, and a tax authority applies its own eligibility tests.
How does R&D appear in company financial statements?
U.S. GAAP: ASC 730
Under U.S. GAAP, Accounting Standards Codification (ASC) 730 addresses research and development activities, costs, accounting and disclosure. The IRS reproduces ASC 730-10-50-1, which says: “Disclosure shall be made in the financial statements of the total research and development costs charged to expense in each period for which an income statement is presented.” In other words, the disclosure concerns costs charged to expense for the periods shown; it is not automatically a measure of every cost a reader might consider research-related.
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The figure may not be labeled simply “R&D.” The IRS notes that relevant costs can appear under captions such as Product Development, Software Development or Engineering research. Check the financial-statement notes and accounting policy as well as the face of the income statement; a caption alone may not reveal the full amount or what it covers. See the IRS FAQ on IRC 41 qualified research expenses and ASC 730.
IFRS: IAS 38
Under IAS 38, research expenditure is recognized as an expense when incurred. Development expenditure is also expensed unless the company can demonstrate that it meets all six criteria for recognizing an intangible asset. Those criteria cover technical feasibility; intention to complete; ability to use or sell; probable future economic benefits; adequate resources to complete the work; and reliable measurement of the expenditure. When all conditions are met, qualifying development costs are recognized as an intangible asset rather than as an immediate expense. The Sanofi filing excerpt available through SEC EDGAR describes the IAS 38 treatment.
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This distinction matters when reading reported spending: an expense figure may not include development costs capitalized on the balance sheet. A company reporting under IFRS may therefore show a different expense total from a company with similar activity reporting under U.S. GAAP.
How company accounts, R&D statistics and tax figures differ
| Context | What the figure represents | What to check |
|---|---|---|
| U.S. GAAP / ASC 730 | R&D costs charged to expense, with disclosure for each income-statement period presented. | Statement caption, notes, accounting policy and whether the amount is reported separately. |
| IFRS / IAS 38 | Research costs expensed; development costs may be capitalized when all IAS 38 criteria are demonstrated. | Whether development costs were capitalized and how that affects the expense figure. |
| R&D statistics | A measure guided by the Frascati statistical definition. NCSES says survey processes may transform records supplied in a respondent’s own terms to the statistical definition. | Definition, sector, geography, funding or performance basis, and any normalization. |
| U.S. tax credit | Qualified research expenses under tax law, not simply book R&D expense. | Tax year, statutory eligibility, jurisdiction and any applicable directive-specific adjustment. |
Statistical agencies may recast company records to make them more consistent with a common definition. That can make published statistics useful for broad comparisons, but it does not mean the underlying company disclosures are directly comparable. NCSES discusses this distinction in its R&D statistics compilation.
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A financial-statement R&D figure does not by itself prove that the underlying activity or costs qualify for a U.S. research credit under Internal Revenue Code Section 41. Tax law applies separate tests. The IRS also states that ASC 730 classification does not by itself establish qualification under Section 41 or Section 174.
The IRS has a limited administrative directive that permits a specified adjusted ASC 730 amount for eligible taxpayers within Large Business and International (LB&I) scope that follow U.S. GAAP and meet the directive’s conditions. It is not a general conversion rule for every company or taxpayer. The directive’s Appendix C computation adjusts or removes items including foreign-entity amounts, internal-use software costs, non-ASC 730 items, costs not eligible for Section 41, and specified wage categories. Those adjustments define that administrative computation; readers should not apply it as a universal formula.
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Tax rules and guidance depend on the tax year. For a particular claim, consult current IRS material, including the IRS research-credit page, and the law applicable to that year.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to compare R&D figures from two companies
Before treating two reported totals as comparable, check these points in each company’s annual report and notes for the same relevant fiscal period:
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- Accounting framework: Is each company reporting under U.S. GAAP, IFRS or another framework?
- Expense versus capitalization: Does the figure include only costs charged to expense, or are some development costs recorded as intangible assets?
- What activity and locations are included: Look for information about the types of work, entities and geographies covered. Statistical and tax measures can use different boundaries.
- Labels and disclosure: Search beyond an “R&D” line for captions such as product, software or engineering development, and read the related policy and notes.
- Purpose of the number: Establish whether it is a financial-statement expense, a harmonized statistical measure or a tax figure. Similar labels do not ensure identical definitions.
Use audited statements and notes for the specific issuer and fiscal year. A company’s own accounting figure is not automatically a standardized industry benchmark, and no single number should be compared without checking how it was defined.
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