Accounting for R&D: Evidence and Implications

22 Pages Posted: 28 Sep 2022

See all articles by Thomas Canace

Thomas Canace

Wake Forest University

Scott B. Jackson

University of South Carolina

Tao Ma

Rawls College of Business, Texas Tech University

Aaron F. Zimbelman

University of South Carolina

Date Written: September 22, 2022

Abstract

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.

Keywords: research and development, R&D capitalization, R&D expense, earnings management, real earnings management, earnings shortfall

JEL Classification: G32

Suggested Citation

Canace, Thomas and Jackson, Scott B. and Ma, Tao and Zimbelman, Aaron F., Accounting for R&D: Evidence and Implications (September 22, 2022). Contemporary Accounting Research, Vol. 39 No. 3 (Fall 2022) pp. 2212–2233 doi:10.1111/1911-3846.12780, Available at SSRN: https://ssrn.com/abstract=4226322

Thomas Canace

Wake Forest University ( email )

2601 Wake Forest Road
Winston-Salem, NC 27109
United States
336-758-5904 (Phone)

Scott B. Jackson

University of South Carolina ( email )

School of Accounting
Moore School of Business
Columbia, SC 29208
United States
(803) 777-3100 (Phone)

Tao Ma (Contact Author)

Rawls College of Business, Texas Tech University ( email )

Box 42101
Lubbock, TX 79409-2101
United States

Aaron F. Zimbelman

University of South Carolina ( email )

Darla Moore School of Business
1014 Greene Street
Columbia, SC 29208
United States

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