Erasmus University Rotterdam Erasmus School of Economics Master Accounting, Auditing and Control Master's Thesis Accounting, Auditing & Control Successful-Efforts
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Research questionIt is obvious that in the automotives industry R&D is an important part of the business strategy. The focus of this research is from an accounting perspective. Financial statements are examined on their usefulness with respect to reported R&D expenditures. More specifically, this research investigates the value relevance of the reported R&D expenditures in the automotives industry. To relate the value relevance of R&D expenditures in the automotives industry to an accounting perspective some elements need to be explained. Visiting the website of the ‘Organisation Internationale des Constructeurs d’Automobiles’ (OICA 2007), showed that most car producers where located in the United States, European Union and Japan. The automotives industry population exist of 107 listed car producers around the world. Based on the criteria that will be discussed in chapter four “Research design” the sample of firms is approximately 30 producers. This is a coverage of 28%. Those firms will be tested over the period from 2000 to 2007. These regions had an own accounting board that provide separate accounting standards. The different accounting boards provided different standards for recognizing R&D expenditures in the financial statements. The FASB prescribes in SFAS 2.12: “All research and development costs encompassed by this Statement shall be charged to expense when incurred”. Lev and Sougiannis (1996), Chambers et al. (2000) and Loudder and Behn (1995) argue that this accounting standard doesn’t provide guidance to report information relevant for users to assess the firms’ equity. This raises the question, what recognition accounting standard is more value relevant to the users of those financial statements in the automotives industry. The different recognition standards as well as the sample selection will be further described in respectively chapter three “Institutional setting” and in chapter five “Research design”. The following research question is developed: Do the different recognition methods of R&D expenditures lead to different value relevance for disclosing R&D expenditures in the period from 2000 to 2007? The research question incorporates the accounting recognitions with respect to R&D expenditures. There are three different types of recognition of R&D expenditures accepted in prior literature (Healy et al. 2002). The first method is cash-expense method prescribed by the Financial Accounting Standard Board (FASB) and the Accounting Standard Board Japan (ASBJ) and the second method is the successful-effort method, which is prescribed by International Accounting Standard Board (IASB). The third method is the full-cost method. This method isn’t used in practise. Those types of recognition are in accordance with Healy et al. (2002, 678). The definitions of the three methods will be provided in chapter two “Research approach”. To answer the main question it is necessary to formulate some sub-questions that will help to construct the research. Besides that some sub-questions are necessary to provide conclusions useful to answer the main research question. As the research question states this is a value relevance research. In value relevance research accounting amounts are related to returns (Deegan and Unerman, 2006, 377). Research on R&D in the financial statements can be done in two ways. The first way uses qualitative data from the annual report to assess an index score per firm. Afterwards, the index scores can be related to the stock returns, which imply a value relevance research. The qualitative data provided is voluntary disclosed. Those studies are called voluntary disclosure studies. The second way is by investigating the prescribed accounting standards. Each listed firm with R&D activities is mandated to reporting the R&D expenditures in the financial statements. This approach uses the quantitative data from the financial statements. The disclosed amounts in the financial statements are related to the market returns. Those studies are called the Usefulness of financial statements studies. These are the two most appropriate approaches for research on the value relevant of R&D expenditures. Besides those research approaches there are some sub-approaches. It is necessary to decide what approach is most appropriate for this main research question. The first sub-question is: What research approach is most appropriate for this research question? This research focuses on the automotives industry. Most automotives firms are located in the US, EU and in Japan. Those regions will be compared on the different methods for recognizing R&D expenditures. To compare the US, EU and Japan with each other on R&D recognition it is necessary to know if there are other important differences between those regions. The differences can be used as control variables. To obtain answers if there are differences, some attention has to be given to the institutional setting. The comparison will be on the level of the economic growth and development, the financial systems and the functions of the financial accounting standards. Furthermore, it is necessary to provide the differences in the accounting standards on R&D. Perhaps some remarkable differences can lead to control variables for the tests. The second sub-question is as follows: What other differences, besides methods for recognizing R&D expenditures, should be kept in mind by doing research on R&D reporting differences between the US, EU and Japan? To obtain a fundament for this empirical research it is necessary to discuss the prior literature that is done in the area of R&D and financial accounting. Besides that the focus will be on the topic of value relevance. The focus in the prior empirical literature will be on the distinction between the value relevance of R&D that uses the cash-expense method and the successful-efforts method. First the capital market researches are discussed. Afterwards, the literature that investigates the difference between the successful-efforts method and the cash-expense method will be discussed. At the end the specific characteristics are discussed that influence the R&D expenditures to returns relation. This should give an overview of what research is already done on the value relevance of R&D expenditures. This overview provides missing elements of research on R&D, which makes this research more relevant. The third sub-question is: What results are available for the value relevance of R&D expenditures and the different recognition methods based on prior literature? To complete the first set of sub-questions that will help to construct this research, the hypotheses, the methodology and the sample has to be chosen. This leads to the fourth sub-question: What research design will be used during this research? The first four sub-questions served to construct the research and obtain basic knowledge. The following two sub-questions are to provide conclusions where the main research question can be answered with. The first part will be an investigation in the earnings returns relation and the impact of R&D expenditures. The second part will be research on the book value returns relation and the impact of the R&D expenditures. This approach will be in line with Healy et al. (2002). This leads to sub-questions five and six. The fifth sub-question is: Are book values recognized using the successful-efforts method more value relevant than when using the cash-expense method? The sixth sub-question is: Are earnings recognized using the successful-efforts method more value relevant than when using the cash-expense method? When the research design is created and the data is collected the statistical tests must be performed. The seventh sub-question is: “What result came from the regression models constructed in chapter five “Research design”?” The last sub-question is about the main conclusion of this research. To complete this research a link has to be made between the results from this research, the hypotheses and the results from the prior empirical literature. The last sub-question is: What is the relation between the results from prior empirical literature, the hypotheses and the test results from this research?
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