Acquired In‐process Research Development and Earnings Management

Abstract

RichmondNew accounting standards, namely SFAS 141 and 142, were adopted in 2001. The release of these two regulations offers a unique opportunity to explore how managers have changed their earnings manipulation behaviour by using In-process Research and Development (IPR&D) costs. In this study, we examine whether and how the amount of IPR&D at the acquisition deals is associated with discretionary accruals, which serve as a proxy for earnings management. We use a sample of firms reporting acquired IPR&D over the period 1993-2007 with a matched group based on size and industry. Our results provide evidence that managers strategically use the IPR&D costs as an income-decreasing earnings management tool, and SFAS 141 and 142 effectively reduced the use of IPR&D costs to manipulate earnings. Furthermore, we examine the effect of SFAS 141R, which was adopted in 2008, on earnings management by using IPR&D. We use a sample of firms reporting acquired IPR&D at the firm level over the period 1993-2011 with a matched group based on size and industry. Results indicate that IPR&D is no longer related to income-decreasing earnings management after the adoption of SFAS 141R. These findings can help accounting regulators determine how to curb the misleading use of IPR&D for earnings management purposes.

Audit committee composition and earnings management in a specific institutional environment: the case of Russia

“…Those judgments mainly arise from the accrual basis of the financial accounting. Hence, by managing a company’s accruals (for example by deciding on whether to expense or capitalize R&D costs), it is possible to impact earnings (Guidara and Boujelbene, 2015; Shust, 2015; Lee et al , 2018). This type of earnings management is called accrual-based earnings management (AEM).…”