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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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4 The Value Relevance of Capitalized Development Costs According to IAS 38 in Germany: Evidence on Investors’ Skepticism in a Continental European Setting


This study investigates a hand-collected sample of 861 firm-year observations from listed German companies for the years 1996-2009 and finds that investors associate future benefits with capitalized development costs according to IAS 38. Further, it demonstrates that for actually reported data a capitalization of de- velopment costs according to IAS 38 not necessarily generates more value rele- vant accounting data than for comparable firms that expense all development costs as incurred. Sensitivity tests reveal that investors are to some extent skep- tical about future benefits from capitalized development costs. This is because investors seem to expect significantly less or even no future benefits in settings where opportunities for earnings management are relatively high and/or the ex- pected future benefits are relatively uncertain. My research extends the scarce evidence on the value relevance of IAS 38 and helps to develop an understand- ing of potential factors that drive investors’ expectations of future benefits from capitalized development costs. 4.1 Introduction and Overview In today’s knowledge economy innovations in processes, products, or services created by investments into R&D are the key for corporations to assure competi- tiveness and long-term survival. As an information system, accounting should provide investors with information about the assets that are critical for corporate success. So far, however, accounting theory has not taken the structural changes of the economy into account, as the accounting for investments into innovations such as R&D outlays is still considered as one of the least developed and most controversial fields in accounting...

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