Signalling the Uncertainty of Future Economic Benefits: Accounting for R&D in Australia

36 Pages Posted: 7 Jan 2010

See all articles by Sue Wright

Sue Wright

University of Newcastle; UTS Business School; Financial Research Network (FIRN)

Anne-Maree Thomas

Macquarie University

Hai Wu

Australian National University (ANU) - College of Business and Economics

Date Written: January 6, 2010

Abstract

This paper contributes empirical evidence to the international accounting debate over whether capitalisation of research and development (R&D) expenditure should be permitted. It exploits more flexible accounting rules in Australia prior to 2005 which allowed expensing or capitalisation of R&D at management discretion. Following Kothari, Laguerre and Leone (2002), association with the uncertainty of future economic benefits is used to evaluate the capitalising versus expensing decision. This paper examines the associations of total R&D expenditures and separate capitalised and expensed R&D expenditures, as well as PPE expenditures, with future earnings variability. The results, which are robust to alternative measures of key variables, show that the expensed R&D is associated with higher earnings variability. We interpret this as indicating that management uses its accounting choice to signal the uncertainty of future economic benefits from R&D expenditures to investors, rather than using it to manage earnings.

Keywords: research and development, accounting discretion, information asymmetry, future economic benefits

JEL Classification: M41, M48

Suggested Citation

Wright, Sue and Thomas, Anne-Maree and Wu, Hai, Signalling the Uncertainty of Future Economic Benefits: Accounting for R&D in Australia (January 6, 2010). CAAA Annual Conference 2010, Available at SSRN: https://ssrn.com/abstract=1532513 or http://dx.doi.org/10.2139/ssrn.1532513

Sue Wright (Contact Author)

University of Newcastle ( email )

University Drive
Callaghan, NSW 2308
Australia

UTS Business School ( email )

Sydney
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Anne-Maree Thomas

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Hai Wu

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia
261253586 (Phone)