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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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6 Evaluation of the Findings


This section evaluates the findings of sections 4 and 5 in context with the re- search question of the thesis if the regulatory efforts of IAS 38 provide measures of R&D capital which (1) constitute relevant information for equity markets, however, at the same time, (2) involve only an acceptable degree of uncertainty. It further provides a discussion about the extent to which the empirical evidence presented addresses arguments that have been discussed within the political de- bate on IAS 38. Finally, the section concludes with a limitation of the thesis which originates from the relatively strong emphasis on the information role of financial accounting in sections 4 and 5. This focus neglects the role of financial accounting information in contracting settings. 6.1 A Synthesis of the Findings on the Trade-off Between Relevance and the Uncertainty of Future Benefits As illustrated in section 3.1.3, the approach pursued by IAS 38 can be inter- preted as trying to strike a balance between full capitalization and full expensing rules of R&D. Consistent with the argument that investors associate future bene- fits with capitalized R&D outlays brought forward by advocates of a capitaliza- tion of R&D outlays, IAS 38 requires a capitalization of development costs un- der certain circumstances. In contrast, consistent with the argument brought forward by those supporting an immediate expensing of R&D outlays, IAS 38 requires all research and the remaining development costs to be expensed as in- curred since future benefits from these investments...

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