Acquired In‐process Research Development and Earnings Management. Issue 4 (24th November 2017)

• Record Type: Journal Article
• Authors: Lee, Junyoup; Lee, Eunsuh; Kim, Kevin H.; Paik, Daniel Gyung H.
• Is Part Of: Australian accounting review. Volume 28:Issue 4(2018:Dec.)
• Page Start: 577
• Page End: 588
• Publication Date: 2017-11-24
• Subjects: Accounting -- Australia -- Periodicals; Accounting -- Standards -- Australia -- Periodicals; Accounting -- Periodicals; Managerial accounting -- Periodicals; Corporations -- Finance -- Periodicals; 657.0994
• DOI: 10.1111/auar.12210
• Languages: English
• ISSNs: 1035-6908

Abstract

Abstract: New 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. Abstract : This paper examines whether and how changes in accounting regulations influence acquired in‐process research and development (IPR&D) costs.