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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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Appendices

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Appendix I: Equality of Dividend Discount and Residual Income Valuation Model Solving equation 3.8 for Et and substituting Et in equation 3.5 with the respec- tive expression allows to express market value of equity as specified in equation 3.4 in terms of future residual income and book value of equity: - ! & ! 1 & 1 ! -. 1 " !#$ In a next step, the calculation below adds up all components of equation AI.1 from an assumed starting period t = 0 until period T → ∞: ; -$ 1 &$ 1 &; -61 6 &6 1 6 &$ 1 -1 > &> 1 > &>'$ 1 >'$ -. 2 Equation AI.2 illustrates the discounted book values of equity cancel out each other over the periods t=1 to T-1. Further T strives to infinity which im- plies that BVET/(1+r) T approaches zero and hence is negligible. Therefore, equa- tion AI.2 can be rewritten in general terms: & / !1 ! -. 3 " !#$ 218 Appendix II: Analytical Illustration That, Except for BVE0, all Components of Equation 3.12 Follow a Converging Geometric Series Equation (3.12) is rearranged as follows to illustrate the converging times series behavior of RI0 as well as vt for t є [0,T-1]: ; &; 1 -; 1'$ 1 > #$ ; 1'$ 1 > #$ $1 1'$ 1 > #$ 61 6 1'$ 1 > #$ … >'$1 >'$ 1'$ 1 > #$ &; 1 1 1 -; 1'$ 1 '$ > #$ ;1 1'$ 1 '$ > #$ $1 6 1'$ 1 '$ > #$ 61 #$ … >'$1 > 1'$ 1 '$ > #$ --. 1 Except for BVE0 all components of equation...

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