R&D Accounting and the Tradeoff Between Relevance and Objectivity

Paul M. Healy, Stewart C. Myers and Christopher D. Howe

Journal of Accounting Research, 2002, vol. 40, issue 3, 677-710

Abstract: We use a simulation model for a pharmaceutical R&D program to examine the tradeoff between objectivity and relevance of accounting information under various methods of R&D reporting. A simple capitalization rule, similar to the successful‐efforts method of capitalizing oil and gas exploration costs, provides a stronger relation between accounting information and economic values than immediate expensing of R&D outlays or capitalizing the full cost of outlays. The superior relevance of this “successful‐efforts” method persists even when earnings management is widespread.

Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:40:y:2002:i:3:p:677-710

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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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