Discretionary Capitalization Of R&D: Evidence On The Usefulness In An Australian And Canadian Context

Smith, Dean T., Percy, Majella, & Richardson, Gordon D. (2001) Discretionary Capitalization Of R&D: Evidence On The Usefulness In An Australian And Canadian Context. In Sale, J. Timothy (Ed.) Advances in International Accounting. Elsevier, pp. 15-46.

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This study addresses the discretionary capitalization of R&D costs in Australia and Canada. We demonstrate, for both samples, that the discretionary capitalization of development costs (hereafter capitalized D) by the manager results in balance sheet and income numbers that are more highly associated with market value, relative to the corresponding "asif" numbers generated by expensing GAAP. Moreover, we show that a dollar worth of capitalized D is worth more than a dollar worth of expensed R&D, for the same firm. This points to a corroboration role for capitalization. As a caveat, our results hold only when the samples are partitioned on the materiality of capitalized D. Our results point to a potentially useful signalling role for discretionary capitalization, in Australian and Canadian capital markets. However, while the manager’s capitalized D is associated with firm value, it has at best a modest advantage over what the analyst can do, using the researchercreated capitalized R&D. Thus, the regulatory policy debate must consider the small incremental benefits from allowing discretionary capitalization compared to the costs associated with earnings management when discretion is allowed.

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ID Code: 2027
Item Type: Book Chapter
Additional Information: For more information about this book please refer to the publisher's website (see link) or contact the author . Author contact details : m.percy@qut.edu.au
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Keywords: research and development, R&D, discretionary capitalization, valuation, accounting for intangibles
ISBN: 9780762307999
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2001 Elsevier
Deposited On: 05 Sep 2005 00:00
Last Modified: 05 Jan 2011 13:25

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