Background: Accounting regulation requires research and development expenses be considered an operating expense and written off in the income statement. There are specific exceptions to this rule. For example, when a product has become commercially feasible in the pharmaceutical industry, all associated costs can be capitalized and considered a capital asset. This capital asset can then be reflected in the balance sheet. The difficulty in accurately valuing the benefits of R&D and the duration of the associated benefits is a primary reason that R&D is not capitalized. But why is this a bad practice from a DCF valuation practice?
This article discusses why is expensing R&D expenses is a bad practice from a DCF valuation perspective.