Erasmus University Rotterdam Erasmus School of Economics Master Accounting, Auditing and Control Master's Thesis Accounting, Auditing & Control Successful-Efforts
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- Conclusions
- Prior empirical research
R&D accounting standardsAfter determining the main differences from an accounting perspective this section provides the standards from the IASB and the FASB for R&D expenditures. The standards from the ASBJ are only available in the Japanese language, this prohibits quoting the standard, but van Mourik (2007) provides the method used for R&D expenditures in Japan. According to International Accounting Standard (IAS) 38.8 research is defined as: “… original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.” Development is defined as: “… the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use.”.
For the development expenditures IFRSs’ prescribe in IAS 38.57: “An intangible asset arising from development (or from the development phase of an internal project) shall be recognized if, and only if, an entity can demonstrate all of the following: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale. (b) its intention to complete the intangible asset and use or sell it. (c) its ability to use or sell the intangible asset. (d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. (e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. (f) its ability to measure reliably the expenditure attributable to the intangible asset during its development.” The conclusion that can be drawn from the standards provided by the IASB is that the successful-efforts method is prescribed. The R&D expenditures must been capitalized if there will be probable economic benefits. The second standard setter that will be discussed is the FASB. The FASB prescribes the following in SFAS 2.12: “All research and development costs encompassed by this Statement shall be charged to expense when incurred”. SFAS 2 contains a detailed description of what must be expensed. In main topics SFAS 2.11 mandates the following: ”Elements of costs shall be identified with research and development activities as follows: a. Materials, equipment, and facilities. b. Personnel. c. Intangible assets purchased from others. d. Contract services. e. Indirect costs”. This means that in contradiction to the IASB the FASB does not mandate to capitalize costs when future benefits are probable. The method that the FASB prescribes is the cash-expense method. There is only one exception in the US. The FASB mandates in SFAS 86.3 and 86.5 that the cost for coding and testing of computer software may be capitalized. ASBJ statement No. 23 Research and development costs1 is only available in the Japanese language. This prohibits quoting the exact standard. Mourik (2007, 142) states that the ASBJ prescribes the same rule as the FASB. This means there is an expense only rule. In consequence to this research it can be referred to as the cash-expense method.
This chapter answered the second sub-question: “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?” In the first section of this chapter the macro-economic analysis is discussed. The conclusion was that, because the firms in the sample are multinational firms, which are selling vehicles around the world, it is not necessary to control for region effects. In the second section the differences from an accounting perspective were discussed. This discussion is based on Ali and Hwang (2007). They discussed five factors that influence value relevance research between countries. The factor common law code law will be used as a control variable in this research. The last section gives the specific description of research and development. Furthermore, in the third paragraph the recognition standards for R&D expenditures in the EU, US and Japan are provided. In the EU the successful-efforts method is prescribed and in the US and Japan the cash-expense method.
After determining the main differences between the three regions in chapter three this chapter shall investigate the prior empirical research for the value relevance of R&D expenditures. This chapter shall answer the third sub-question: “What results are available for the value relevance of R&D expenditures and the different recognition methods based on prior literature?” As discussed in paragraph 2.4 “research approach from prior empirical literature” the prior empirical literature can be placed in a scheme. The first paragraph discusses the value relevance capital market research of R&D expenditures. The second paragraph discussed the empirical literature for expensing versus capitalizing. In prior empirical research there are specific characteristics investigated. Those studies will be discussed in paragraph three “specific characteristics”. Those specific characteristics could lead to control variables, that where not found during the analysis of the institutional setting in chapter two. The answer on sub-question three will be given in the last paragraph. All articles used in this literature review are summarized in Appendix 1 ‘Summary empirical literature’.
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