Accounting for R&D on the income statement? Evidence on non-discretionary vs. discretionary R&D capitalization under IFRS in Germany

This paper compares the informativeness of discretionary research and development (R&D) capitalization under IAS 38 with non-discretionary “as-if” R&D capitalization. While prior consistently demonstrated capital market benefits capitalization, evidence for reported are less favorable due to earnings management concerns. Because studies based on adjusted data assuming resulting numbers free from such concerns may be more informative. We find that capitalized is not associated lower information asymmetry but positively forecast errors. values R&D, they strongly R&D. Also, actual expenditures only as value relevant when expensing all Our results consistent notion participants undo use expensed develop their own estimates value. findings lend support proposition by Barker Penman (2020) deficiencies balance sheet result uncertainty inherent in should supplemented detailed nature related expenses income statement.