TY - JOUR
T1 - Accounting for R&D
T2 - Evidence and Implications*
AU - Canace, Thomas G.
AU - Jackson, Scott B.
AU - Ma, Tao
AU - Zimbelman, Aaron
N1 - Publisher Copyright:
© 2022 The Authors. Contemporary Accounting Research published by Wiley Periodicals LLC on behalf of the Canadian Academic Accounting Association.
PY - 2022/9/1
Y1 - 2022/9/1
N2 - Accounting rules require that certain R&D expenditures be capitalized, but academic research often states that all R&D expenditures must be immediately expensed. An accurate understanding of actual R&D accounting practices is critical because that understanding influences research questions and design choices. To examine the competing R&D accounting perspectives, we survey 184 experienced financial officers. Our survey reveals that R&D capitalization is common and extensive in practice. Over 90% of respondents indicate that their firm capitalizes at least some R&D expenditures, and our evidence shows that about 22% of annual R&D expenditures are capitalized. When facing an earnings shortfall, respondents indicate that firms are often willing to cut R&D expense. However, respondents also indicate an unwillingness to cut types of R&D expenses that cause long-term harm—for example, laying off scientists or delaying the execution of trials—and they often redirect the freed-up R&D resources to R&D expenditures that are capitalized. Using archival data, we also corroborate our survey finding about the pervasiveness of capitalized R&D, and we demonstrate its empirical implications. Our study helps to align the characterization of R&D accounting rules in the academic literature with the authoritative professional literature and provides a more nuanced understanding of firms’ R&D response to an earnings shortfall.
AB - Accounting rules require that certain R&D expenditures be capitalized, but academic research often states that all R&D expenditures must be immediately expensed. An accurate understanding of actual R&D accounting practices is critical because that understanding influences research questions and design choices. To examine the competing R&D accounting perspectives, we survey 184 experienced financial officers. Our survey reveals that R&D capitalization is common and extensive in practice. Over 90% of respondents indicate that their firm capitalizes at least some R&D expenditures, and our evidence shows that about 22% of annual R&D expenditures are capitalized. When facing an earnings shortfall, respondents indicate that firms are often willing to cut R&D expense. However, respondents also indicate an unwillingness to cut types of R&D expenses that cause long-term harm—for example, laying off scientists or delaying the execution of trials—and they often redirect the freed-up R&D resources to R&D expenditures that are capitalized. Using archival data, we also corroborate our survey finding about the pervasiveness of capitalized R&D, and we demonstrate its empirical implications. Our study helps to align the characterization of R&D accounting rules in the academic literature with the authoritative professional literature and provides a more nuanced understanding of firms’ R&D response to an earnings shortfall.
KW - R&D capitalization
KW - R&D expense
KW - earnings management
KW - earnings shortfall
KW - real earnings management
KW - research and development
UR - http://www.scopus.com/inward/record.url?scp=85133693377&partnerID=8YFLogxK
U2 - 10.1111/1911-3846.12780
DO - 10.1111/1911-3846.12780
M3 - Article
AN - SCOPUS:85133693377
SN - 0823-9150
JO - Contemporary Accounting Research
JF - Contemporary Accounting Research
ER -