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Accounting for R&D Investments According to IAS 38

And the Conflicting Forces that Shape Financial Accounting: An Empirical Analysis

Series:

Michael Ordosch

The thesis empirically investigates two conflicting views on the accounting treatment of R&D outlays according to IAS 38. Proponents of a capitalization of R&D outlays argue that this accounting policy provides relevant information to investors. In contrast, those opposing such a capitalization state that the resulting asset is too uncertain. The findings demonstrate that the arguments of both supporters and opponents basically remain valid and are therefore to some extent incompatible. However, given this incompatibility a discussion of the empirical findings in context with the arguments brought forward within the political debate surrounding IAS 38 illustrates that IAS 38 eventually pursues a reasonable approach to balance these conflicting views.

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Vorwort................................................................................................................. V Geleitwort ........................................................................................................... VII Table of Contents ................................................................................................ IX List of Figures .................................................................................................. XIV List of Tables ..................................................................................................... XV List of Abbreviations ....................................................................................... XVII List of Symbols ................................................................................................ XIX 1 Introduction and Overview ................................................................................. 1 1.1 Introduction and Overview on the Thesis .................................................. 1 1.2 The Key Characteristics and Relevance of R&D Investment ................... 9 1.2.1 The Relevance of Intangibles in the Information Economy ........... 9 1.2.2 The Economic Properties of Intangible Investment ...................... 13 1.3 Accounting for R&D Investments in Selected Regulatory Backgrounds 16 2 Related Literature: Empirical Research on Accounting for R&D ................... 23 2.1 Accounting for R&D and the Relevance of Financial Accounting Information .............................................................................................. 23 2.1.1 Accounting for R&D and its Relevance for Equity Investors ...... 24 2.1.2 Accounting for R&D and its Relevance for Debt Investors ......... 29 2.2 Accounting for R&D and the Reliability of Financial Accounting Information .............................................................................................. 30 2.2.1 Accounting for R&D and Earnings Management Incentives ....... 31 2.2.2 Accounting for R&D and the Uncertainty of Future Benefits ...... 33 2.3 Summary of Related Literature and Contribution of the Thesis ............. 34 X 3 Research Question and Methodology .............................................................. 38 3.1 Research Question ................................................................................... 38 3.1.1 The Financial Objectives and Risk Characteristics of Capital Providers ........................................................................................ 39 3.1.2 Accounting for R&D and the Information Needs of Capital Providers ........................................................................................ 41 3.1.3 Accounting for R&D According to IAS 38 .................................. 45 3.2 Methodology ............................................................................................ 47 3.2.1 Overview: Empirical Financial Accounting Research .................. 48 3.2.2 Capital Market-oriented Accounting Research ............................. 51 3.2.3 The Assumption of Efficient Capital Markets .............................. 52 3.2.4 Research Design of the Thesis ...................................................... 56 3.2.4.1 Balance Sheet...

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