Accounting regulation requires research and development expenses to 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?
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.
Here is a great video on capitalizing R&D from Professor. Damodharan.