Document Type

Article

Abstract

Accounting rules require that certain R&D expenditures be capitalized, but academic research often states that all R&D expenditures must be immediately expensed. An accurate understanding of actual R&D accounting practices is critical because that understanding influences research questions and design choices. To examine the competing R&D accounting perspectives, we survey 184 experienced financial officers. Our survey reveals that R&D capitalization is common and extensive in practice. Over 90% of respondents indicate that their firm capitalizes at least some R&D expenditures, and our evidence shows that about 22% of annual R&D expenditures are capitalized. When facing an earnings shortfall, respondents indicate that firms are often willing to cut R&D expense. However, respondents also indicate an unwillingness to cut types of R&D expenses that cause long-term harm—for example, laying off scientists or delaying the execution of trials—and they often redirect the freed-up R&D resources to R&D expenditures that are capitalized. Using archival data, we also corroborate our survey finding about the pervasiveness of capitalized R&D, and we demonstrate its empirical implications. Our study helps to align the characterization of R&D accounting rules in the academic literature with the authoritative professional literature and provides a more nuanced understanding of firms’ R&D response to an earnings shortfall.

Digital Object Identifier (DOI)

https://doi.org/10.1111/1911-3846.12780

Rights

© 2022 The Authors. Contemporary Accounting Research published by Wiley Periodicals LLC on behalf of the Canadian Academic Accounting Association.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

APA Citation

Canace, T. G., Jackson, S. B., Ma, T., & Zimbelman, A. (2022). Accounting for R&D: Evidence and Implications*. Contemporary Accounting Research, 39(3), 2212–2233.https://doi.org/10.1111/1911-3846.12780

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