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Accounting for R&D Investments According to IAS 38

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


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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2 Related Literature: Empirical Research on Accounting for R&D


23 2 Related Literature: Empirical Research on Accounting for R&D The two research papers at the core of this thesis are in the spirit of the relev- ance-reliability trade-off which is at the heart of the debate on the appropriate accounting treatment of R&D outlays. For this reason the related literature sec- tion is divided into two major subsections dealing with aspects of relevance and reliability, respectively. The subsection related to aspects of relevance covers studies that are at least to some extent motivated by investigating the question if the accounting treatment of R&D outlays matters to either equity or debt inves- tors. The subsection on aspects of reliability discusses studies that address issues like earnings management and the uncertainty of future benefits. Earnings man- agement through the accounting treatment of R&D outlays affects reliability as it causes accounting information to be erroneous, biased, and not faithful any more. As discussed in section 1.1 applying a broader definition of reliability the relatively high uncertainty of future benefits associated with R&D investments can also be interpreted as a feature of reliability. Overall, this section aims to provide an overview on the empirical studies that have been conducted on the accounting treatment of R&D outlays. Such an overview allows integrating the research conducted in this thesis into existing literature and identifying its con- tribution to this literature. 2.1 Accounting for R&D and the Relevance of Financial Accounting Information As discussed in section 1.2 research documents...

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