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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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5 The Uncertainty of Future Benefits From R&D Capital – The Case of Capitalized Development Costs According to IAS 38

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125 5 The Uncertainty of Future Benefits From R&D Capital – The Case of Capitalized Development Costs According to IAS 38 Applying a sample of 350 firm-year observations from listed German companies for the years 1996-2004 this study empirically investigates the frequently cited argument that R&D capital is too uncertain to be recorded as an asset on the bal- ance sheet. For this purpose I estimate the association of capitalized develop- ment costs according to IAS 38 (R&D capital) with the uncertainty of future benefits. The results suggest that R&D capital according to IAS 38 contributes more to the uncertainty of future benefits than tangible capital. Comparing the uncertainty of future benefits of capitalizers and expensers reveals that recording R&D capital does not contribute to a higher uncertainty of capitalizers relative to expensers for accounting-based measures of uncertainty. A potential explana- tion for this finding may be that despite being a more uncertain asset R&D capi- tal only plays a minor role on the balance sheet of capitalizers and therefore does not contribute to a higher uncertainty of this group relative to expensers. Finally, evidence demonstrates that particularly for stock markets R&D capital seems to be a significant source of uncertainty. Comparing my findings to previous re- search cautiously suggests that R&D investment may have become even more uncertain. 5.1 Introduction and Overview The worldwide adoption of IFRS disseminates the accounting for R&D outlays according to IAS 38. This standard requires all...

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