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The effect of in-process research and development capitalization on M&A and purchase price allocations

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  • Dowdell, Thomas D.
  • Lim, Steve C.

Abstract

We investigate whether the change in accounting treatment of in-process research and development cost (IPRD) from expensing to capitalization affects the frequency of acquiring target firms with IPRD and the purchase price allocated to IPRD. We examine 1490 acquisitions in high-technology industries using a unique data set of purchase price allocations. For our sample as a whole, we find that the accounting rule change does not reduce the number of acquisitions with IPRD or the purchase price allocated to IPRD, but our results vary by industry. We provide evidence that the frequency of acquisitions with IPRD decreased for two of the four industry groups and IPRD intensity (IPRD/Assets Acquired) decreased for two industry groups. Our study contributes to research that examines whether mandatory accounting changes affect company economic decisions and research on managing earnings using IPRD.

Suggested Citation

  • Dowdell, Thomas D. & Lim, Steve C., 2015. "The effect of in-process research and development capitalization on M&A and purchase price allocations," Research in Accounting Regulation, Elsevier, vol. 27(1), pages 51-56.
    • Handle: RePEc:eee:reacre:v:27:y:2015:i:1:p:51-56
    DOI: 10.1016/j.racreg.2015.03.006
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    References listed on IDEAS

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    1. Kathy Hsiao Yu Hsu & Young Sang Kim & Kyojik ‘Roy’ Song, 2009. "The Relation Among Targets’ R&D Activities, Acquirers’ Returns, and In‐Process R&D in the US," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9‐10), pages 1180-1200, November.
    2. Dowdell, Thomas D. & Press, Eric, 2004. "The impact of SEC scrutiny on financial statement reporting of in-process research and development expense," Journal of Accounting and Public Policy, Elsevier, vol. 23(3), pages 227-244.
    3. Thomas D. Dowdell & Steve C. Lim & Eric Press, 2009. "Were In‐Process Research and Development Charges Too Aggressive?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5‐6), pages 531-551, June.
    4. Derrick, Patricia L.D., 2013. "Accounting for promises: The impact of SFAS No. 116 on charities," Research in Accounting Regulation, Elsevier, vol. 25(2), pages 208-219.
    5. Fasci, Martha A. & Willis, Veronda F., 2013. "The impact of GAAP guidance on asset retirement obligations," Research in Accounting Regulation, Elsevier, vol. 25(1), pages 117-122.
    6. Kathy Hsiao Yu Hsu & Young Sang Kim & Kyojik 'Roy' Song, 2009. "The Relation Among Targets' R&D Activities, Acquirers' Returns, and In-Process R&D in the US," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9-10), pages 1180-1200.
    7. Webinger, Mariah & Comer, Matt & Bloom, Robert, 2013. "The effect of additional guidance on fair value measurement and disclosure in illiquid or inactive markets," Research in Accounting Regulation, Elsevier, vol. 25(2), pages 220-229.
    8. Thomas D. Dowdell & Steve C. Lim & Eric Press, 2009. "Were In-Process Research and Development Charges Too Aggressive?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5-6), pages 531-551.
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    Cited by:

    1. Junyoup Lee & Eunsuh Lee & Kevin H. Kim & Daniel Gyung H. Paik, 2018. "Acquired In‐process Research Development and Earnings Management," Australian Accounting Review, CPA Australia, vol. 28(4), pages 577-588, December.
    2. Shin Hyoung Kwon & Guannan Wang, 2020. "The change in the value relevance of accounting information after mergers and acquisitions: evidence from the adoption of SFAS 141(R)," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2717-2757, September.

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