The Amount and Quality of R&D Capitalization under International Financial Reporting Standards (IFRS)

51 Pages Posted: 13 Dec 2023

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Huixia Chen

Renmin University of China

Jenny Guan

Monash University

Kangtao Ye

Renmin University of China - School of Business

Date Written: November 14, 2023

Abstract

The Financial Accounting Standards Board (FASB) is currently investigating how to improve the accounting for R&D costs. We examine the amount and quality of capitalized R&D costs when firms are allowed to do so under IFRS, and offer four main findings. First, less than one-third of firm-years with R&D costs capitalize any amount of R&D, and, among those that do, only one-fifth of total R&D costs are capitalized. These findings suggest that, when given discretion, firms do not appear to capitalize significant amounts of R&D. Second, we predict and find that R&D labor costs are a proxy for R&D quality, as evidenced by a lower likelihood of cutting R&D spending and lower R&D employee turnover, and a greater number of current and future patents. Third, we find a positive association between this proxy for R&D quality and the amount of R&D costs that firms capitalize. This suggests that, when given discretion, firms appear to capitalize R&D of high quality. Finally, we find that capitalized R&D costs are positively associated with investors pricing, but only when R&D is high quality. In additional analysis, we examine real effects from a recent IFRS-country R&D disclosure mandate, finding that it increased both the level and quality of R&D expenditures. Overall, our findings suggest that when R&D can be capitalized and disclosure quality is high, firms appear to capitalize legitimate R&D costs, and that, at a minimum, the FASB can improve R&D accounting by requiring firms to disclose R&D information, including labor costs.

Keywords: R&D accounting; Disclosure regulation; R&D labor costs; Innovation

Suggested Citation

Campbell, John L. and Chen, Huixia and Guan, Jenny and Ye, Kangtao, The Amount and Quality of R&D Capitalization under International Financial Reporting Standards (IFRS) (November 14, 2023). Available at SSRN: https://ssrn.com/abstract=4632001 or http://dx.doi.org/10.2139/ssrn.4632001

John L. Campbell (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Huixia Chen

Renmin University of China ( email )

Jenny Guan

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Kangtao Ye

Renmin University of China - School of Business ( email )

Beijing
China

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