Accounting regulation requires research and development expenses to be considered an operating expense and written off in the income statement. There are specific exemptions to this rule. However, the portion of R&D spend that is capitalized is usually only a small part of R&D. However, most companies benefit from R&D spending in the form of acquired know-how. This acquired know-how is a valuable asset that produces cash flow in the future. Analysts and investors should want the value of R&D spending in the balance sheet. So R&D should be treated like another investment and the R&D spending capitalized like other assets such as an investment in a building.
How does capitalizing R&D expenses impact the cash flow statements?
The cash flow statements deal with cash flows. When you capitalize the R&D statements, you do not change any R&D policy – you neither increase nor decrease any expenditure! You only change the way it is accounted for. In other words, you are only making book adjustments and so you do not impact the cash flow statements.
Here is a great video on capitalizing R&D from Professor. Damodharan.