Product Development Cost: Expense vs Capitalise Decision Under AS 26
Capitalising product cost can flatter EBITDA and assets. Auditors will ask whether it meets recognition criteria and whether benefits are demonstrable.
The AS 26 test, in one table
AS 26 draws a hard line between research (always expensed — there is no exception) and development (capitalised only if all six recognition criteria are met). "Research" is the search for new knowledge or evaluating alternatives before a commercially viable product design exists; "development" is applying that knowledge to a plan or design for a new or improved product before commercial production. Even within development, capitalisation is not automatic — it requires demonstrating, at the time the cost is incurred: (1) technical feasibility of completing the asset, (2) intention to complete it and use or sell it, (3) ability to use or sell it, (4) how it will generate probable future economic benefits (an identifiable market or internal use), (5) availability of adequate technical, financial and other resources to complete development and to use or sell the asset, and (6) ability to measure the development expenditure reliably. Fail any one criterion and the cost is expensed, not capitalised — there is no partial credit.
Detailed analysis
Bug fixes, routine maintenance and minor feature tweaks to an already-working product are not "development" in the AS 26 sense at all — they are maintenance expense, full stop, regardless of engineering effort involved. Genuine development spend on a new module or product only qualifies for capitalisation from the point all six criteria above are first met; costs incurred before that point (including the research phase) cannot be capitalised retrospectively once the criteria are later satisfied.
Practical example
Engineering spends ₹80 lakh building v2 platform. Finance separates research prototypes, capitalisable development work, support tickets and routine maintenance, then documents rationale and amortisation start date.
Evidence and control checklist
| Area | What to check | Evidence to save |
|---|---|---|
| Definition and owner | Define product development cost, owner, source system and review frequency. | Metric dictionary, owner matrix and version log. |
| Source data | Books, bank, CRM, payroll, billing, contracts or statutory filings used. | Source extracts and reconciliation sheet. |
| Computation logic | Formula, assumptions, exclusions and period consistency. | Working paper and CFO sign-off. |
| Decision impact | How the output affects pricing, hiring, spend, funding or compliance. | Management note and action tracker. |
| Diligence evidence | Whether an investor/auditor can verify the number independently. | Indexed folder with contracts, reports and approvals. |
Common mistakes
- Capitalising all tech salary.
- No project-level timesheets.
- No technical feasibility evidence.
- Ignoring impairment/abandoned projects.
- No amortisation policy.
Official reference framework
Based only on official India Code, Startup India, RBI, Income Tax Department, MCA and ICAI source pages listed below. Check latest law, forms, accounting standards and professional advice before execution.
Official sources used
This article is source-limited to official India Code, Startup India, RBI, Income Tax Department, MCA and ICAI material. Source validation date: 17 June 2026. Verify final positions with latest law, accounting standards, tax rules and professional advice before execution.
- MCA: Accounting Standard (AS) 26 Intangible Assets
- ICAI: Accounting Standards
- India Code: Companies Act, 2013 Section 129 - Financial statement
- India Code: Schedule III to the Companies Act, 2013
As the company scales past AS 26 to Ind AS, see Ind AS 38: Intangible Assets — Recognition, Amortisation & Impairment for the equivalent capitalisation test.
FAQs
Because it converts founder intuition into a number that finance, investors and boards can verify.
Using a metric or number without a defined formula, source data and reviewer sign-off.
Monthly for operating metrics; weekly for cash/runway-sensitive items.
Finance/controller should own the evidence and computation; business teams should own the operating input.
No metric without source data, no forecast without assumptions, and no board number without reconciliation.
Source and review trail
Use the current official instrument, portal or regulator publication before acting. This panel separates the category authority from page-specific references.
- Primary category
- Startup Finance & Cap Tables
- Official starting point
- www.startupindia.gov.in
Page source links
AS 26 recognition decision
- Identify
Separate research, development, maintenance, training, data and marketing. - Test
Technical feasibility, intention and ability to complete/use or sell. - Evidence
Probable future benefits, resources and reliable cost measurement. - Account
Capitalise only qualifying costs from the recognition date; amortise and test impairment.
Download official Accounting Standard AS 26
Example
A team spends Rs 18 lakh exploring alternatives and Rs 42 lakh after the board approves a technically feasible product with documented resources, market evidence and reliable time records. The exploration spend remains expense. Only qualifying development expenditure from the evidenced recognition date is assessed for capitalisation.
Audit file
Keep stage-gate approvals, technical feasibility, budgets, forecast assumptions, legal rights, employee time records, vendor invoices, useful-life memo, amortisation schedule and impairment indicators. Exclude general overhead and post-launch maintenance unless independently eligible.
Primary source: MCA Accounting Standard AS 26. Related: this decision guide.
Entities following Ind AS must apply the corresponding Ind AS framework. This page is educational accounting guidance.