Acquired In‐process Research Development and Earnings Management

Junyoup Lee, Eunsuh Lee, Kevin H. Kim and Daniel Gyung H. Paik

Australian Accounting Review, 2018, vol. 28, issue 4, 577-588

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.

Date: 2018
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