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-   -   How do you classify this situation detailed below? (https://www.askmehelpdesk.com/showthread.php?t=438565)

  • Jan 24, 2010, 10:40 AM
    mosleyclm
    How do you classify this situation detailed below?
    An existing company has begun to work on another product and patent. The existing company has collected about 38k in expense for this development. The plan is to create a new entity, which will house this new product and patent. The expenses that we have already accumulated, we would like for the new company to pay and take on the expenses. However, at the end of the year this new company was not in place. On the existing books we do not want these expenses. So, can I bill out these expenses to the new pending company. Or, since I know it is not legally formed yet, can I list it on the balance sheet. If so, how should I classify. Work in process? Can you please assist?
  • Jan 27, 2010, 10:53 PM
    morgaine300

    Has no one answered this yet? OK, dumb question cause it's pretty clear no one has. :D

    I can't totally answer you which is why I've been ignoring it, but I will tell you what I can. If you actually do R&D work for another company, you're perfectly welcome to charge that to that company -- basically turns it into a service you're doing for them.

    What I don't know is what to do about a situation where the company doesn't even exist yet. If that company is going to be formed by you and be some type of subsidiary or that type of situation, that's getting into some more advanced stuff that I've done in like a chapter in college (lots of years ago) but never actually worked with. I see rehmanvohra has made a return appearance - that's more recent stuff for him and he could answer that better. In fact, maybe by me posting on here, it'll knock this up from page 3 where he might not be seeing it.

    You're essentially doing the R&D to create the new product, in essence doing the preliminary work for a new company that doesn't exist yet. These aren't technically start-up costs, but I could see the argument for treating it as "pre-opening" costs for the new company. I can also see the argument that it's your current company who bore all the costs for something the purpose of which is to help get that new company started, in a way like saying the outcome of having the new company was part of the "use" of the R&D. I see both arguments. But that is something I'm unsure of the answer - not even sure I ever studied any such thing.

    What I can tell you is that you cannot capitalize them, with few exceptions. If you take on these costs yourself, it's not capitalized, and is not "work in process." It's R&D. Not the same thing as work in process. Most R&D costs are expensed right away. If you have something that would normally be capitalized and you are going to use it in the future -- even if for more R&D -- then you can still capitalize it. For instance, if you bought some equipment to use for this and are able to use that equipment in the future, for whatever, then you can capitalize it. The idea behind this is that you can still reasonably estimate its useful life, cause it's equipment just like any other equipment. It's very difficult to reasonably estimate the future value of most R&D costs. The other thing is that you can still count things like patents as an intangible, as long as it's following all the rules you'd normally follow. Selling & admin costs are still selling & admin costs, unless you can very directly attribute them to the R&D.

    R&D is not really a lot of fun. That's a basic overview and not all the details.

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