John --
Under SFAS 2, "Accounting for Research and Development Costs," it is
generally accepted that prototypes are expensed as a pre-production
process. That last piece -- "pre-production process" -- is important
because it specifically excludes it from the work-in-process of
initial production. I'll come back to this to reflect on the special
treatment of prototypes from professional experience at the end of
this answer. Thus, it's a period expense and one that should be
classified under R&D.
This article updates treatment of R&D and prototypes:
The CPA Journal
"Accounting and Tax Treatment of R&D: An Update," (Oliver, July 2003)
http://www.nysscpa.org/cpajournal/2003/0703/dept/d074603.htm
This note from the Arthur Consulting Group confirms the same point,
though they treat the issue from the point of view of an acquiring
company looking to judge how an acquisition's capital & depreciation
can be changed upon purchase:
Arthur Consulting Group
"Financial Analysis"
http://www.arthurconsulting.com/financialSpecial7.htm
---
Having worked for a major American electronics manufacturer,
prototypes get special treatment at several levels:
* they can be taken across borders without a tariff, though the
Japanese may require a bond to ensure that they leave the country.
"Work-in-process" or importation of inventory would not get the same
liberal treatment.
* they can be used for demonstration purposes without FCC class A or
class B approvals (though they have to be labeled as prototypes and
unapproved under FCC standards, if shown to the public).
Particularly in the electronics industry, both of these conditions
mean that the prototype is highly unlikely to turn into "work in
process". Equipment is often taken across borders to show the factory
engineers what the end product concept is -- but actual production
engineering will change many individual components for
manufacturability.
Similarly, prototypes done for FCC testing often require changes to
reduce electromagnetic interference, which means the prototype has
jumper wires, coils or shielding that are not appropriate in
production units.
Google search strategy:
FASB prototypes accounting
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Best regards,
Omnivorous-GA |
