Determinants and value relevance of the choice of accounting for research and development expenditures in the United Kingdom

Oswald, D (2000) Determinants and value relevance of the choice of accounting for research and development expenditures in the United Kingdom. Working Paper. London Business School Accounting Working Paper.

Abstract

This paper investigates the determits and value relevance implications of the accounting method choice for development expenditures for firms with research and development (R&D) programs in the United Kingdom (UK). Using a sample of 1,780 UK firmyear observations over 19931997, of which I classify 231 (1,549) firm year observations as Capitalizers (Expensers), I find that the decision to expense versus capitalize is influenced by firm size, the intensity of the firm's R&D programs, and whether the firm is in a steadystate with respect to its R&D programs. Results of value relevance tests indicate that Expensers have little to gain, if anything, in terms of value relevance from adjusting their reported earnings and book value of equity to reflect asif capitalized numbers. For the Capitalizers, the value relevance of asifexpensed earnings and book value of equity is not substantially lower than the value relevance of their reported earnings and book value of equity. Additional analysis indicates that the steadystate status and R&D intensity of a firm's R&D programs may marginally influence the value relevance of their ficial information. These results are in contrast to those in US studies that find that capitalization of R&D expenditures greatly enhances the value relevance of firms' ficial statements.