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National Science Foundation
Definitions of Research and Development.
Contents
Introduction
U.S. Businesses
   bullet Financial Accounting Standards Board
   bullet U.S. Code of Federal Regulations
   bullet Government Surveys
U.S. Federal Government
U.S. Academic and Nonprofit Organizations
International Organizations
Additional Resources
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Definitions of Research and Development:
An Annotated Compilation of Official Sources

U.S. Businesses

A. Financial Accounting Standards Board

Description:
Financial Accounting Standards Board (FASB) statements form the basis of generally accepted accounting principles for businesses with activities in the United States. R&D costs for businesses are defined in Statement of Financial Accounting Standards No. 2, paragraphs 8–10, issued October 1974. Pronouncements with related information include:

  • FASB Interpretation No. 4 — Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method (issued February 1975)
  • FASB Interpretation No. 6 — Applicability of FASB Statement No. 2 to Computer Software (issued February 1975)
  • Statement of Financial Accounting Standards No. 7(FASB) — Accounting and Reporting by Development Stage Enterprises (issued June 1975)
  • Statement of Financial Accounting Standards No. 68 (FASB) — Research and Development Arrangements (issued October 1982)
  • Statement of Financial Accounting Standards No. 86(FASB)— Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (issued August 1985)
  • Statement of Financial Accounting Standards No. 142 (FASB) — Goodwill and Other Intangible Assets (issued June 2001)
  • Statement of Position 98-1, American Institute of Certified Public Accountants (AICPA) — Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

The full text of FASB statements and other pronouncements is available at http://www.fasb.org/st/index.shtml. AICPA statements are available at http://www.aicpa.org/pubs/jofa/sep98/appacct.htm.


Definition (as appears in the original source):
Statement of Financial Accounting Standards No. 2–Accounting for Research and Development Costs (http://www.fasb.org/pdf/fas2.pdf)
  1. For purposes of this Statement, research and development is defined as follows:
    1. Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service (hereinafter "product") or a new process or technique (hereinafter "process") or in bringing about a significant improvement to an existing product or process.
    2. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. It includes the conceptual formulation, design, and testing of product alternatives, construction of prototypes, and operation of pilot plants. It does not include routine or periodic alterations to existing products, production lines, manufacturing processes, and other on-going operations even though those alterations may represent improvements and it does not include market research or market testing activities.
  2. The following are examples of activities that typically would be included in research and development in accordance with paragraph 8 (unless conducted for others under a contractual arrangement—see paragraph 2)
    1. Laboratory research aimed at discovery of new knowledge.
    2. Searching for applications of new research findings or other knowledge.
    3. Conceptual formulation and design of possible product or process alternatives.
    4. Testing in search for or evaluation of product or process alternatives.
    5. Modification of the formulation or design of a product or process.
    6. Design, construction, and testing of pre-production prototypes and models.
    7. Design of tools, jigs, molds, and dies involving new technology.
    8. Design, construction, and operation of a pilot plant that is not of a scale economically feasible to the enterprise for commercial production.
    9. Engineering activity required to advance the design of a product to the point that it meets specific functional and economic requirements and is ready for manufacture.
  3. The following are examples of activities that typically would be excluded from research and development in accordance with paragraph 8:
    1. Engineering follow-through in an early phase of commercial production.
    2. Quality control during commercial production including routine testing of products.
    3. Trouble-shooting in connection with break-downs during commercial production.
    4. Routine, on-going efforts to refine, enrich, or otherwise improve upon the qualities of an existing product.
    5. Adaptation of an existing capability to a particular requirement or customer’s need as part of a continuing commercial activity.
    6. Seasonal or other periodic design changes to existing products.
    7. Routine design of tools, jigs, molds, and dies.
    8. Activity, including design and construction engineering, related to the construction, relocation, rearrangement, or start-up of facilities or equipment other than (1) pilot plants (see paragraph 9(h)) and (2) facilities or equipment whose sole use is for a particular research and development project (see paragraph 11(a)).
    9. Legal work in connection with patent applications or litigation, and the sale or licensing of patents


B. U.S. Code of Federal Regulations

Description:
Section 1.174-2 of the U.S. Code of Federal Regulations (Title 26, Internal Revenue) specifies the definition of R&D for tax filing purposes. Full text is available at http://www.access.gpo.gov/nara/cfr/waisidx_03/26cfr1v3_03.html.


Definition (as appears in the original source):
  • 1.174-2 Definition of research and development expenditures.
    (a) In general. (1) The term research or experimental expenditures, as used in section 174, means expenditures incurred in connection with the taxpayer’s trade or business which represent research and development costs in the experimental or laboratory sense. The term generally includes all such costs incident to the development or improvement of a product. The term includes the costs of obtaining a patent, such as attorneys’ fees expended in making and perfecting a patent application. Expenditures represent research and development costs in the experimental or laboratory sense if they are for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product. Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product. Whether expenditures qualify as research or experimental expenditures depends on the nature of the activity to which the expenditures relate, not the nature of the product or improvement being developed or the level of technological advancement the product or improvement represents.
  • (2) For purposes of this section, the term product includes any pilot model, process, formula, invention, technique, patent, or similar property, and includes products to be used by the taxpayer in its trade or business as well as products to be held for sale, lease, or license.
  • (3) The term research or experimental expenditures does not include expenditures for:
  • (i) The ordinary testing or inspection of materials or products for quality control (quality control testing);
  • (ii) Efficiency surveys;
  • (iii) Management studies;
  • (iv) Consumer surveys;
  • (v) Advertising or promotions;
  • (vi) The acquisition of another’s patent, model, production or process; or
  • (vii) Research in connection with literary, historical, or similar projects.


C. Government Surveys

down arrow.NSF Survey of Industrial Research and Development
down arrow.Industry R&D in Surveys of the U.S. Bureau of Economic Analysis


NSF Survey of Industrial Research and Development

Description:
This survey is the primary source of information on R&D performed by industry within the United States. Definitions are available in the instructions for the survey (see http://www.nsf.gov/statistics/srvyindustry/surveys/srvyindus_rd1i_2005.pdf).


Definition (as appears in the original source):
R&D includes the following:
  • the planned, systematic pursuit of new knowledge or understanding toward general application (basic research);
  • the acquisition of knowledge or understanding to meet a specific, recognized need (applied research); and
  • the application of knowledge or understanding toward the production or improvement of a product, service, process, or method (development).

...This survey specifically excludes quality control, routine product testing, market research, sales promotion, sales service, and other nontechnological activities; routine technical services; and research in the social sciences or psychology.

This survey defines basic research, applied research, and development as follows:

Basic research is the pursuit of new scientific knowledge or understanding that does not have specific immediate commercial objectives, although it may be in fields of present or potential commercial interest.

Applied research applies the findings of basic research or other existing knowledge toward discovering new scientific knowledge that has specific commercial objectives with respect to new products, services, processes, or methods.

Development is the systematic use of the knowledge or understanding gained from research or practical experience directed toward the production or significant improvement of useful products, services, processes, or methods, including the design and development of prototypes, materials, devices, and systems.

INCLUDE:

  • Wages, salaries, and related costs
  • Materials and supplies consumed
  • R&D depreciation
  • Cost of computer software used in R&D activities
  • Utilities, such as telephone, telex, electricity, water, and gas
  • Travel costs and professional dues
  • Property taxes and other taxes (except income taxes) incurred on account of the R&D organization or the facilities they use
  • Insurance expenses
  • Maintenance and repair, including maintenance of buildings and grounds
  • Company overhead including: personnel, accounting, procurement and inventory, and salaries of research executives not on the payroll of the R&D organization

EXCLUDE:

  • R&D from acquired companies prior to acquisition (in-process R&D)
  • Capital expenditures
  • Testing and evaluation once a prototype becomes a production model
  • Patent expenses
  • Income taxes and interest

Industry R&D in Surveys of the U.S. Bureau of Economic Analysis

Description:
The surveys on direct investment conducted by the U.S. Bureau of Economic Analysis (BEA) collect data on the business activities, including R&D, of affiliates of foreign multinational corporations in the United States (Survey of Foreign Direct Investment in the U.S. [FDIUS]) and of parent companies of U.S. multinational corporations and their foreign affiliates (Survey of U.S. Direct Investment Abroad [USDIA]). Survey forms with definitions are available at http://www.bea.gov/bea/surveys/fdiusurv.htm (for FDIUS) and http://www.bea.gov/bea/surveys/diasurv.htm (for USDIA).


Definition (as appears in the original source):
Survey of Foreign Direct Investment in the U.S. (FDIUS)

FDIUS: Research and development — R&D includes basic and applied research in the sciences and engineering. It also includes design and development of new products and processes, and enhancement of existing products and processes.

R&D includes activities carried on by persons trained, either formally or by experience, in the physical sciences such as chemistry and physics, the biological sciences such as medicine, and engineering and computer science. R&D includes these activities if the purpose is to do one or more of the following things:

  1. Pursue a planned search for new knowledge, whether or not the search has reference to a specific application (Basic research);
  2. Apply existing knowledge to problems involved in the creation of a new product or process, including work required to evaluate possible uses (Applied research); or
  3. Apply existing knowledge to problems involved in the improvement of a present product or process. (Development).

R&D includes the activities described above whether assigned to separate R&D organizational units of the company or carried out by company laboratories and technical groups not a part of an R&D organization.

Survey of U.S. Direct Investment Abroad (USDIA)

USDIA: Research and development expenditures — R&D includes the following:

  1. The planned, systematic pursuit of new knowledge or understanding toward general application (basic research);
  2. The acquisition of knowledge or understanding to meet a specific, recognized need (applied research); and
  3. The application of knowledge or understanding toward the production or improvement of a product, service, process, or method (development).

Basic research is the pursuit of new scientific knowledge or understanding that does not have specific immediate commercial objectives, although it may be in fields of present or potential commercial interest.

Development is the systematic use of the knowledge or understanding gained from research or practical experience directed toward the production or significant improvement of useful products, services, processes, or methods, including the design and development of prototypes, materials, devices, and systems.

Applied research applies the findings of basic research or other existing knowledge toward discovering new scientific knowledge that has specific commercial objectives with respect to new products, services, processes, or methods.

R&D includes the activities described above, whether assigned to separate organizational units of the company or conducted by company laboratories and technical groups that are not a part of a separate R&D organization.

Exclude expenditures for quality control; routine product testing; market research; sales promotion, sales service, and other nontechnological activities; routine technical services; research in the social sciences or psychology; geological and geophysical exploration activities, and advertising programs to promote or demonstrate new products or processes.

Include all costs incurred to support R&D. Include wages, salaries, and related costs; materials and supplies consumed; R&D depreciation, cost of computer software used in R&D activities; utilities, such as telephone, telex, electricity, water, and gas; travel costs and professional dues; property taxes and other taxes (except income taxes) incurred on account of the R&D organization or the facilities they use; insurance expenses; maintenance and repair, including maintenance of buildings and grounds; company overhead including: personnel, accounting, procurement and inventory, and salaries of research executives not on the payroll of the R&D organization. Exclude capital expenditures, expenditures for tests and evaluations once a prototype becomes a production model, patent expenses, and income taxes and interest.

 

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