Were In‐Process Research and Development Charges Too Aggressive?

Dowdell, Thomas D.; Lim, Steve C.; Press, Eric

doi:10.1111/j.1468-5957.2009.02155.x

Cited by 7 publications

(8 citation statements)

References 23 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…19 Manipulation of earnings through the choice of expensing or capitalization of R&D is well documented in prior literature. For example, Dowdell et al (2009) provide evidence of manipulating earnings through expensing of in-process R&D. 20 Oswald (2008) investigates the decision to expense versus capitalize development expenditures in UK setting where capitalization is allowed. The decision is influenced by earnings variability, earnings sign, firm size, R&D intensity, leverage, steady-state status of the firm's R&D program, and R&D program success.…”

Section: Discussionmentioning

confidence: 99%

See 1 more Smart Citation

Market Underestimation of the Implications of R&D Increases for Future Earnings: The US Evidence

Ali

Ciftci

Cready

2012

Business Fin & Account

View full text Add to dashboard Cite

This study shows that future abnormal returns to R&D increases are concentrated around subsequent earnings announcements. It further shows that market expectations, implied from stock prices, underestimate the future earnings benefits of increase in R&D. Finally, it documents that in their forecasts of future earnings, security analysts also underestimate the effect of increase in R&D spending. These results suggest that future abnormal returns following R&D increases are at least in part due to the market's underestimation of the earnings benefits of R&D increases. The finding in this study contributes to the longstanding debate in accounting on whether the US GAAP requirement to expense R&D costs when incurred causes investors to underestimate the benefits of R&D.

show abstract

Section: Discussionmentioning

confidence: 99%

“…19 19 Manipulation of earnings through the choice of expensing or capitalization of R&D is well documented in prior literature. For example, Dowdell et al (2009) provide evidence of manipulating earnings through expensing of in‐process R&D. …”

mentioning

confidence: 99%

Market Underestimation of the Implications of R&D Increases for Future Earnings: The US Evidence

Ali

Ciftci

Cready

2012

Business Fin & Account

View full text Add to dashboard Cite

show abstract

“…Prior literature finds that managers increased allocations to goodwill when it became amortizable for tax purposes in 1993 (Henning and Shaw 2000;Weaver 2000). More recent studies provide evidence consistent with managers increasing allocations to goodwill or in-process R&D in response to financial reporting incentives (e.g., Dowdell et al 2009;Shalev 2009;). Yet in both sets of studies, managers could make discretionary financial reporting decisions without sacrificing tax benefits and vice versa.…”

Section: Introductionmentioning

confidence: 87%

Trade‐offs between Tax and Financial Reporting Benefits: Evidence from Purchase Price Allocations in Taxable Acquisitions

Lynch

Romney

Stomberg

et al. 2019

Contemporary Accting Res

View full text Add to dashboard Cite

Under U.S. GAAP, firms recognize assets acquired in business combinations at fair value. Similarly, in taxable asset acquisitions firms adjust the tax basis of assets to fair value. Managers can increase the present value of future tax savings by allocating a greater portion of the purchase price to shorter‐lived assets than to goodwill or indefinite‐lived intangibles. However, this tax planning strategy imposes a financial reporting cost because it reduces book income following the acquisition; all else equal, allocations to shorter‐lived depreciable assets increase book depreciation expense, whereas allocations to goodwill and indefinite‐lived intangibles do not increase book amortization expense. We exploit the features of taxable asset acquisitions to investigate trade‐offs between tax and financial reporting incentives. We predict and find greater allocations to depreciable versus intangible assets when managers have strong tax incentives and weak financial reporting incentives. However, we also find that strong financial reporting incentives moderate the effects of strong tax incentives. These findings contribute new evidence to the literature on the importance of nontax costs in tax planning decisions

show abstract

“…Dowdell et al. () argue that ensuring proper financial reporting of IPR&D write‐off continues to be challenging and requires significant judgement, suggesting that IPR&D costs can be manipulated in nature. Slavin and Khan (: 63) argue that ‘The IPR&D value is then estimated by calculating the present value of expected incremental cash flows from the project, using a discount rate reflecting the risk of the research project.…”

Section: Prior Literature On Iprandd and Hypotheses Developmentmentioning

confidence: 99%

“…Owing to the lack of specific guidance, allocating IPR&D cost can be subjective and managers’ decisions can be discretionary (Dowdell et al. ). Prior to SFAS 141 and 142 in 2001, managers who wanted to avoid ‘future earnings drag’ could do so by allocating more of the acquisition price to IPR&D expense.…”

mentioning

confidence: 99%

Acquired In‐process Research Development and Earnings Management

Lee¹,

Lee²,

Kim

et al. 2017

Australian Accounting Review

View full text Add to dashboard Cite

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.

show abstract

Were In‐Process Research and Development Charges Too Aggressive?

Cited by 7 publications

References 23 publications

Market Underestimation of the Implications of R&D Increases for Future Earnings: The US Evidence

Market Underestimation of the Implications of R&D Increases for Future Earnings: The US Evidence

Trade‐offs between Tax and Financial Reporting Benefits: Evidence from Purchase Price Allocations in Taxable Acquisitions

Acquired In‐process Research Development and Earnings Management

Contact Info

Product

Resources

About