Research and Development (R&D)

What Is Research and Development (R&D)?

Research and development, also known as R&D, is the part of a firm responsible for researching and innovating new technologies, products, and production methods.

Investing in R&D is one key way that a company can stay up-to-date with the modern world and stay ahead of its competitors.

The amount a company spends each year on R&D will vary considerably from different sectors, with biotech, technology, and pharmaceutical companies tending to spend the most

Companies and governments conduct research and development (R&D) to enhance existing products. 

R&D typically occurs in a company's initial stage during the development process, in which newly envisioned products are subjected to viability assessments by researchers.

Its objective is to develop new products or services for market placement that will boost a company's profits. In the product development cycle, the R&D stage plays a vital role. 

Organizations will often brainstorm new concepts to gain a competitive edge over rival businesses. Research and development serve as a tool for creating novel services or items. 

By utilizing effective R&D strategies, a company can thrive in the market by raising customer satisfaction, increasing sales, and elevating its competitive standing against other industry entities.

Various advantages can be obtained through R&D efforts, such as uncovering fresh concepts and knowledge, discovering inventive ways to utilize current products, and optimizing the application of pre-existing products. 

Engaging in R&D efforts can lead to acquiring patents or trademarks, expanding product lines into new markets, and gaining a competitive edge over industry rivals.

Understanding Research and Development (R&D)

R&D is crucial in various industries and businesses, enabling them to remain pertinent and fulfill their customers' evolving requirements. Activities encompassed in R&D include scientific study, design, testing, and engineering.

Research and development, an undervalued aspect, facilitates innovation and growth in various industries. Companies that allocate funds to R&D are more likely to devise products and services that cater to customer needs and outshine their rivals. 

The significance of research and development cannot be emphasized enough.

Take the Tesla Roadster, for example. It was the outcome of Tesla's extensive investment in research and development, helping set the scene for the company's meteoric rise during the COVID-19 recession

Tesla's commitment to R&D is evident as its spending soared to nearly $3.1 billion in 2022, surpassing other areas of investment. The substantial allocation of funds highlights the significance of R&D within Tesla, underscoring its dedication to innovation and technological advancements. 

Aiming to advance cutting-edge technologies and bring them to market, Tesla Energy Institute Research Development Innovation Incorporated was established. This organization is dedicated to 

• Applied research 
• Innovation 
• Commercialization

Similarly, Taiwan Semiconductor Manufacturing (TSM) is also dedicated to pursuing the cutting edge. Its spending on R&D reached billions during 2022 to develop the novel 3nm technology.

TSM chose to do this because technological dominance is a crucial factor in the world of semiconductors. The 3nm technology is predicted to be nearly 15% faster than the current 5nm technology. 

While this may seem insignificant, the applications of this are limitless. By developing this technology, TSM gets a competitive advantage and a strong foothold for the future in the growing industry.

Stages of Research And Development

R&D has stages that are essential for success. Each stage has unique goals that are important to address. Planning is the first stage, where objectives and research ideas are brainstormed before approval.

The next stage involves discovery, which includes testing and experimentation to ensure the feasibility and potential success of the project. Once the discovery stage is complete, the development stage begins, where all findings and research are combined to create a final product. 

The final stage is implementation, where the product is introduced to the market, and any subsequent feedback is reviewed for future improvements.

Planning

Identifying the problem or opportunity that needs attention is the first step in the potential and problem analysis stage. During this stage, the feasibility and value of the project are determined to decide whether it is worth pursuing.

Discovery

The next process stage after identifying a problem or opportunity is data collection. The aim is to obtain a wealth of information, which will inform subsequent stages.

Identifying a problem or opportunity commences the product design stage, where a service or product is crafted to tackle the issue. The objective is to construct a model that can be modified and scrutinized.

Development

Prototype testing is the focus of the product validation stage, where the overall objective is to assess whether the product or service aligns with the target audience's requirements.

The product or service requires amendments during the product revision stage, informed by feedback from the product validation phase. Refinement of the product or service is the objective, ensuring it accurately aligns with the target market's needs.

Implementation

This stage involves testing the revised product or service in a real-world setting. Afterward, the data collected is analyzed and reported. In doing so, the company or government can identify areas for improvement.

Advantages and Disadvantages of R&D

There are numerous benefits and drawbacks of research and development. While it can provide long-term gains for a company, its short term costs can make it a difficult goal to obtain.

Here are some of its strengths and weaknesses:

1. Increased efficiency: Technological advancements and innovative techniques developed through extensive research and development can help companies improve their productivity and reduce expenses.
2. Improved Quality: Enterprises may develop novel and dependable services and products that fulfill customers' desires and expectations with research and development assistance, resulting in higher quality.
3. Higher profits: Companies that spend on research and development are likely to increase their profits. This profitability boost comes from the development of newer offerings that attract greater sales.
4. Better Reputation: Companies typically receive positive consumer feedback on their innovative products and services. The success of these products can boost the reputation of the company.
5. More jobs: Research and development ventures can yield gratifying results in terms of employment. Fresh opportunities emerge in the form of jobs, particularly in domains like innovation, engineering, and aesthetics.

R&D comes with certain downsides, such as:

1. High cost: Conducting R&D demands considerable expertise and resources, making it a costly endeavor. Smaller businesses, lacking the means to invest in R&D, may face obstacles in entering the field.
2. High-risk: Novelty is not a guaranteed path to success for a product or service, making investing in R&D a risky endeavor.
3. Time-intensive: The amount of time it can take is often a significant setback in moving forward with product development.

Research And Development Vs. Applied Research

When it comes to R&D, there are two main types—basic and applied. Basic research seeks to expand our world understanding through scientific exploration and prediction. This is often achieved by investigating molecular processes or other fundamental concepts.

In contrast, applied research tries to create practical solutions to resolve real-world problems. This involves using existing knowledge to develop techniques and technologies, such as disease treatments. 

Basic R&D

In its simplest form, a company can conduct research to enhance its comprehension of its patrons' essential requirements. One example is conducting a study to identify the causes of customer delight.

Applied R&D

Companies' applied research can result in new products or improvements to existing ones. Take, for instance, a more effective battery developed by a company.

Research and development (R&D) can be divided into three types: basic research, applied research, and experimental development. 

Basic research is conducted primarily to gain new insights into the foundations of observable phenomena without any particular application in mind. In contrast, applied research aims to achieve specific practical objectives.

Meanwhile, experimental development involves systematic efforts to create new products, devices, or materials by using existing knowledge acquired from research or practical experience. 

Furthermore, it also focuses on installing new processes, systems, or services while significantly improving the existing ones. Without any specific purpose in mind, basic research sets out to acquire new knowledge about the underlying foundations of phenomena and observable facts. 

Basic research is a methodical study that seeks to attain a more profound comprehension of the fundamental elements of a concept or phenomenon. Experimental and theoretical work in basic research serves as a preliminary exploration toward gaining a better understanding of various applications.

Often, applied research is aimed at a generic objective, like exploring a technological frontier that can tackle the challenges of a particular industry. Targeted at satisfying customers' requirements, applied research is a category of research devoted to formulating novel products and services. 

It involves scavenging for market information and devising strategies to enhance an existing product or invent fresh ones to fulfill the ascertained demands. 

Due to the partnership between companies and the private sector, public sector, or not-for-profit organizations, applied research promotes cohesion with universities and other colleges.

This type of research aims to cater to the needs of target markets by creating new products and services or improving on existing ones. The primary focus is finding innovative methods to satisfy identified needs.

R&D Accounting

R&D accounting is an area that requires careful attention. This process can be complex and requires thorough documentation.

Essential components of R&D accounting include identifying all research and development activities, tracking expenses associated with these projects, and determining the proper accounting treatment for these expenses. 

R&D accounting must be handled with precision to ensure accurate financial reporting and compliance with applicable laws.

Investment in research and development comprises all funds expended generating ideas and transforming them into marketable products. Proper research and development accounting entails accounting for expenses as soon as they are incurred. 

In this area, the fundamental accounting principle is that expenses must be charged as they are incurred. Deciding whether to expense or capitalize costs has always been a dilemma for accountants due to the risky nature of R&D.

Recording a cost as an asset, with the belief that benefits are long-term, is called capitalizing. Meanwhile, expensing indicates short-lived benefits. 

Capitalizing may look like this:

Assets on the balance sheet are recognized when capitalized and reduced annually by depreciation or amortization. On the income statement, this is recognized as an expense. 

This may look like this:

In contrast, expensing recognizes a cost as an expense on the income statement during the same period it was incurred. 

While expensing is applied to immediately consumed expenditures, capitalizing is used for expenditures that occur over an extended time period and are typically capital in nature. For expenditures that aren't capital in nature, expensing should be utilized.

For example, expenses may be incurred by a company for various purposes, including: 

• Conducting research for knowledge
• Achieving new research breakthroughs 
• Devising product and process blueprints
• Testing both products and processes
• Reworking formulas
• Products or processes
• Creating and trialing prototypes
• Crafting tools for emerging technology
• Establishing a prototype facility

The fundamental tenet for accounting amid these activities involves expenses being expensed in real-time.

Understandably, the concept of allocating every research and development expenditure to expense isn't always applicable. There are some exceptional cases to consider, such as the acquisition of fixed assets, which could be utilized in the future. 

In this case, these should be recognized and recorded as assets, with materials charged to expense as they are used up and depreciation utilized to reduce the value of these fixed assets gradually.

If there are alternative uses for computer software, it should be capitalized and then depreciated over its useful life, but this is an exception to the core accounting rule. If computer software is used in a research and development project, it should be charged to expense as it is acquired.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Capital Expenditure (Capex)
• Capitalized Cost
• Depreciated Cost
• Full Disclosure Principle
• IFRS Standards