Were In‐Process Research and Development Charges Too Aggressive?

Thomas D. Dowdell, Steve C. Lim and Eric Press

Journal of Business Finance & Accounting, 2009, vol. 36, issue 5‐6, 531-551

Abstract: Abstract: Prior research documents that US firms write off large in‐process research and development charges (IPRD) for acquisitions, possibly overstating the current period expense to inflate future earnings. Consequently, in 1998, the US Securities and Exchange Commission (SEC) began scrutinizing IPRD charges. We use pre‐acquisition R&D expenses of 144 target firms as a benchmark for assessing whether IPRD charges are appropriate. Overall, the results suggest that most firms during our sample period were not overly aggressive in expensing IPRD–especially for acquisitions subsequent to the SEC's scrutiny. The results also indicate that the SEC's intervention reduced the frequency of overstated IPRD charges.

Date: 2009
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