Introduction
BMW spent €8.3 billion on research and development (R&D) in 2025, yet only €6.8 billion reached its income statement as R&D expenses, reported within cost of sales. The difference reflects a rule US companies do not follow: under International Financial Reporting Standards (IFRS), BMW capitalized €3.4 billion of development costs as intangible assets and charged €2.0 billion of amortization on development capitalized in earlier years. A US carmaker spending the same money would have expensed all of it under US generally accepted accounting principles (US GAAP), reporting lower operating profit and lower earnings before interest, taxes, depreciation and amortization (EBITDA) for the same cars and the same cash outflow.
The difference comes from International Accounting Standard (IAS) 38, Intangible Assets, which divides internal projects into a research phase and a development phase and requires development costs to be capitalized once specific criteria are met. For bankers comparing European and Asian companies reporting under IFRS with US peers, it is one of the most consequential accounting differences, especially in automotive, aerospace, engineering and technology. The US approach it contrasts with is covered in R&D accounting under US GAAP.
The IAS 38 Rule: Research Expensed, Development Capitalized
IAS 38 splits an internal project into two phases. Spending in the research phase, original investigation aimed at gaining new knowledge, is always expensed. Spending in the development phase, applying that knowledge to design or produce new or substantially improved products, must be capitalized as an intangible asset once the company can demonstrate all of the following:
- Technical feasibility of completing the asset so that it will be available for use or sale.
- Intention to complete the asset and use or sell it.
- Ability to use or sell it.
- Probable future economic benefits, shown by a market for the output or for the asset itself or, if used internally, its usefulness.
- Adequate technical, financial and other resources to complete the development and to use or sell the asset.
- Reliable measurement of the expenditure attributable to the asset during development.
- Capitalized development costs
Costs of the development phase of an internal project recognized as an intangible asset under IAS 38 once all six recognition criteria are met. They are amortized over the expected useful life of the resulting product, beginning when it is available for use, and tested for impairment.
Two features make the rule distinctive. Capitalization is required, not optional, once the criteria are met, although the judgment about when they are met leaves considerable discretion. And costs expensed before the criteria were met cannot later be reinstated as an asset, so the asset reflects only spending after the point of feasibility. If a company cannot distinguish the research phase from the development phase of a project, it treats all of the spending as research and expenses it. KPMG's guidance on capitalizing internally generated intangible assets confirms the timing: directly attributable costs are capitalized from the date all six criteria can be demonstrated, and expenditure already expensed cannot be reinstated.
How Capitalization Moves the Statements
Suppose a company spends €100 on development in a year, of which €60 meets the IAS 38 criteria, and amortizes capitalized development over five years once production starts. In the first year, before production, nothing is amortized:
| Line item | US GAAP | IFRS |
|---|---|---|
| Development spending in the year | 100 | 100 |
| Capitalized as an intangible asset | 0 | (60) |
| Amortization of earlier capitalized costs | 0 | 0 |
| Research and development expense | 100 | 40 |
| EBITDA effect | (100) | (40) |
| Operating cash flow effect | (100) | (40) |
| Investing cash flow effect | 0 | (60) |
| Total cash spent | 100 | 100 |
Under IFRS the 60 capitalized is shown in investing activities, so operating cash flow and EBITDA are both higher by 60, while total cash spent is unchanged.
Under IFRS, the company reports €60 less expense, €60 more EBITDA and €60 more operating cash flow in the first year, with the capitalized amount in investing activities alongside other capital spending. Cash is identical. In later years, as production starts, amortization of €12 a year flows into expense, and once a company has been capitalizing steadily for several years, annual amortization approaches the annual amount capitalized, so operating profit converges with the US figure. EBITDA does not converge: because amortization is excluded from EBITDA, an IFRS reporter's EBITDA stays higher by the amount capitalized each year, the steady-state effect explained in capitalizing vs expensing costs.
Impairment and Deferred Taxes
Capitalized development brings two further consequences. Because the asset is not yet available for use while development continues, IAS 36 requires it to be tested for impairment every year, and a project that fails or a product whose sales disappoint triggers a write-down, a non-cash charge that brings forward the expense a US company would already have recognized. And because tax rules in many countries let companies deduct development spending as incurred, the capitalized asset usually has a lower tax basis than its carrying amount, creating a deferred tax liability that unwinds as the asset is amortized.
BMW's Development Costs in Practice
BMW discloses exactly how its research and development spending reaches the income statement, in a reconciliation in its 2025 group financial statements:
| Line item | 2024 | 2025 |
|---|---|---|
| Research and development expenditure | 9,078 | 8,319 |
| New capitalized development costs | (3,525) | (3,427) |
| Amortization of capitalized development costs | 2,089 | 1,956 |
| Research and development expenses | 7,642 | 6,848 |
| Capitalization rate | 38.8% | 41.2% |
Source: BMW Group Report 2025, group financial statements. Capitalization rate is new capitalized development costs as a share of research and development expenditure.
In both years, BMW capitalized more development spending than it amortized, by about €1.4 billion in 2024 and €1.5 billion in 2025, so its reported R&D expense was lower than its spending, and its operating profit correspondingly higher than it would have been under US GAAP. BMW explains that capitalized development costs are amortized on a straight-line basis from the start of production over the expected product life, usually five to twelve years. A carmaker in the middle of an intensive product cycle, as BMW has been with its new generation of electric vehicles, therefore capitalizes heavily ahead of launches and sees amortization build up only once the models are on sale.
Adjusting IFRS Reporters for Comparison
When comparing an IFRS reporter with a US peer, bankers usually put both on the same basis. The simplest adjustment reverses the capitalization for the IFRS company:
- 1.EBITDA: deduct the year's capitalized development costs, since a US company would have expensed them.
- 2.Operating income: deduct capitalized development costs and add back the amortization of previously capitalized costs.
- 3.Capital expenditure and free cash flow: remove capitalized development from capex; free cash flow is unchanged, because the cash outflow simply moves from investing to operating.
- 4.Balance sheet: remove the capitalized development asset, and the related deferred tax, when comparing asset-based ratios such as return on assets.
For BMW in 2025, the first adjustment would reduce EBITDA by about €3.4 billion, and the second would reduce operating income by about €1.5 billion, the excess of capitalization over amortization. The alternative is to adjust the US company instead, capitalizing its development spending using a similar policy, which is harder because US companies do not disclose the split between research and development phases. The broader set of adjustments for IFRS reporters is covered in adjusting IFRS reporters for US comparisons.
The IAS 38 rule is often defended as giving a truer picture of companies whose development spending creates long-lived products, and it does put real assets on the balance sheet. For a banker, though, the practical consequence is simpler: an IFRS reporter's EBITDA, operating cash flow and capital expenditure each include an accounting choice that a US company does not make, and the comparison only works once that choice has been reversed. The full map of framework differences that matter for valuation is in US GAAP vs IFRS differences.
