A New Perspective on R&D Accounting

King, Zachary
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U.S. GAAP generally requires firms to expense R&D outlays as incurred, a requirement that many prominent stakeholders view as deficient in reflecting the value of a firm’s R&D program. Prior academic research supports this view by applying a theory for tangible capital to the issue of R&D accounting. However, tangible capital is modeled in this theory as an item that can be used immediately to generate revenues with no uncertainty. Different from tangible capital, many R&D investments can be described as uncertain multi-period ventures in which measurable progress can be made each period, but revenues can only be generated in future periods after the venture is successfully completed. I apply and extend an alternative theory that models this well documented and uncertain time lag between R&D cash outflows and inflows. Theoretical analyses predict that R&D expensing results in more value relevant accounting numbers than R&D capitalization and amortization. Empirical tests confirm these predictions in a sample of R&D intensive firms, suggesting that current accounting reflects the value of a firm’s R&D program better than R&D capitalization and amortization. This research is timely because many prominent stakeholders believe the opposite, and such beliefs have motivated the FASB to consider changing U.S. GAAP in recent years.
Accounting policy, accounting standards, dynamic R&D investment, standard setting
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