The Capitalization, Amortization, and Value-Relevance of R&D
The presumed absence of a relation between R&D expenditures and subsequent benefits was a major reason for the FASB’s decision in 1974 to require the full expensing of R&D outlays in financial reports of public corporations. The last 20 years have witnessed an unprecedented growth of R&D investment in the U.S. and other developed economies and the emergence of new, science-based industries (e.g., software, biotechnology, and telecommunications). Nevertheless, the requirement for full R&D expensing in the U.S.-based on the assertion that ‘a direct relationship between research and development costs and specific future revenue generally has not been demonstrated. . . ’-is still in effect.l Apparently
U.S. standard-setters are concerned with the reliability and objectivity of the estimates required for R&D capitalization, and with the associated audit risk. The specter of providing managers with additional opportunities for earnings management must also weigh heavily on regulators.