To clear up some prior confusion, the Finance Department will use the following criteria in determining what are R&D receipts. This criteria is based on pronouncement of the Financial Accounting Standard Board.

Research and Development are defined as follows:

a. 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.

b. Developmentis 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 ongoing operations, even though those alterations may represent improvements; and it does not include market research or market-testing activities.

A process may be a system whose output is to be sold, leased, or otherwise marketed to others. A process also may be used internally as a part of a manufacturing activity or a service activity where the service itself is marketed. A process may be intended to achieve cost reductions as opposed to revenue generation. Paragraph (b) above, however, specifically excludes from research and development activities "market research or market-testing activities." It is intended that the acquisition, development, or improvement of a process by an enterprise for use in its selling or administrative activities be excluded from the definition of research and development activities.

The following are examples of activities that typically would be included in research and development.

a. Laboratory research aimed at discovery of new knowledge.

b. Searching for applications of new research findings or other knowledge.

c. Conceptual formulation and design of possible product or process alternatives.

d. Testing in search for or evaluation of product or process alternatives.

e. Modification of the formulation or design of a product or process.

f. Design, construction, and testing of reproduction prototypes and models.

g. Design of tools, jigs, molds, and dies involving new technology.

h. Design, construction, and operation of a pilot plant that is not of a scale economically feasible to the enterprise for commercial production.

i. 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.

The following are examples of activities that typically would be excluded from research and development.

a. Engineering follow-through in an early phase of commercial production.

b. Quality control during commercial production including routine testing of products.

c. Trouble-shooting in connection with breakdowns during commercial production.

d. Routine, ongoing efforts to refine, enrich, or otherwise improve upon the qualities of an existing product.

e. Adaptation of an existing capability to a particular requirement or customer’s need as part of a continuing commercial activity.

f. Seasonal or other periodic design changes to existing products.

g. Routine design of tools, jigs, molds, and dies.

h. Activity, including design and construction engineering, related to the construction, relocation, rearrangement, or start-up of facilities or equipment other than (1) pilot plants and (2) facilities or equipment whose sole use is for a particular research and development project.

i. Legal work in connection with patent applications or litigation and the sale or licensing of patents.

Computer Software
Computer software is developed for many and diverse uses. Accordingly, in each case the nature of the activity for which the software is being developed is to be considered in relation to receipts from the sale of the above definition of research and development to determine whether software should be included or excluded.

Receipts generated from the sale or lease of computer software developed specifically for others are not research and development receipts unless the software is for use in research and development activities. The phrase "for use in research and development activities" includes tools used to facilitate research and development or products or processes that are undergoing research and development activities.

Questioned Costs
If a question develops as to how these guidelines apply, the Director of Finance shall make the final determination as to whether a firm’s receipts qualify as research and development receipts.

Laura Triggs
Acting Director of Finance
City of Alexandria
(703) 838-4755
laura.triggs@alexandriava.gov