IDEAS home Printed from https://ideas.repec.org/a/pal/ijodag/v13y2016i2d10.1057_jdg.2015.14.html
   My bibliography  Save this article

Capitalizing R&D expenditures or expensing them all?: Evidence from the accounting environment of South Korea

Author

Listed:
  • Pyung K Kang
  • Yoo Chan Kim

    (College of Business and Economics, Hanyang University)

Abstract

This study first aims to introduce the accounting environment of South Korea including standard-setting bodies, the procedures of establishment and amendment of accounting standards, and accounting conventions for research and development (R&D) expenditures. Furthermore, this study investigates the veiled ambilaterality of accounting treatments for capitalization of R&D as (i) a communication channel and (ii) a tool of opportunistic earnings management. Using data from South Korea specifically focused on the transition period toward full adoption of the International Financial Reporting Standards (IFRS), this study tests whether the uncertainty of future economic benefits can be reflected in R&D capitalization and whether managers can engage in managing earnings through discretionary accounting choice of R&D capitalization. Through simple statistics and visual inspection, this study finds that the variability of future economic benefits from R&D expenditures decreases as the degree of R&D capitalization increases, suggesting that R&D capitalization can play a role in communicating R&D-specific knowledge with information users outside the company. On the other hand, following Burgstahler and Dichev’s test, this study also finds that the discontinuity at the zero-profit point in the distribution of earnings intervals is alleviated when capitalizing R&D expenditures is not allowed, implying that a possibility of opportunistic earnings management may exist. This study can provide a meaningful implication to the United States and countries still considering the adoption of IFRS.

Suggested Citation

  • Pyung K Kang & Yoo Chan Kim, 2016. "Capitalizing R&D expenditures or expensing them all?: Evidence from the accounting environment of South Korea," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 13(2), pages 117-134, May.
    • Handle: RePEc:pal:ijodag:v:13:y:2016:i:2:d:10.1057_jdg.2015.14
    DOI: 10.1057/jdg.2015.14
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/jdg.2015.14
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/jdg.2015.14?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eli Amir & Yanling Guan & Gilad Livne, 2007. "The Association of R&D and Capital Expenditures with Subsequent Earnings Variability," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 222-246, January.
    2. Cazavan-Jeny, Anne & Jeanjean, Thomas & Joos, Peter, 2011. "Accounting choice and future performance: The case of R&D accounting in France," Journal of Accounting and Public Policy, Elsevier, vol. 30(2), pages 145-165, March.
    3. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    4. Jeanjean, Thomas & Stolowy, Hervé, 2008. "Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption," Journal of Accounting and Public Policy, Elsevier, vol. 27(6), pages 480-494.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sangpil Yoon & Gyuhyung Kim & Yanghon Chung & Hosung Son, 2023. "Is customer involvement always beneficial for R&D efficiency? The difference between high‐tech and low‐tech industries," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1678-1688, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dargenidou, Christina & Jackson, Richard H.G. & Tsalavoutas, Ioannis & Tsoligkas, Fanis, 2021. "Capitalisation of R&D and the informativeness of stock prices: Pre- and post-IFRS evidence," The British Accounting Review, Elsevier, vol. 53(4).
    2. Mehdi Nekhili & Fahim Javed & Haithem Nagati, 2022. "Audit Partner Gender, Leadership and Ethics: The Case of Earnings Management," Journal of Business Ethics, Springer, vol. 177(2), pages 233-260, May.
    3. Trimble, Madeline, 2018. "A reinvestigation into accounting quality following global IFRS adoption: Evidence via earnings distributions," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 33(C), pages 18-39.
    4. Lam, Kevin C.K. & Sami, Heibatollah & Yao, Jun & Yao, Yiwei, 2023. "Mandatory IFRS adoption and earnings management: The role of culture," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    5. Marco Fasan & Carlo Marcon, 2014. "Accounting Tradition and other drivers of the Fair Value choice: An Opportunistic Management perspective," Working Papers 13, Venice School of Management - Department of Management, Università Ca' Foscari Venezia.
    6. Oz, Ibrahim Onur & Yelkenci, Tezer, 2018. "Examination of real and accrual earnings management: A cross-country analysis of legal origin under IFRS," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 24-37.
    7. Guillaume Dumas, 2012. "Le Comportement Myopique D'Investissement En R&D : Une Realite En France ?," Post-Print hal-00690955, HAL.
    8. Brettschneider, Carina, 2019. "R&D Accounting Discretion as an Income Smoothing Tool: An Empirical Analysis of German Listed Companies," Junior Management Science (JUMS), Junior Management Science e. V., vol. 4(2), pages 151-172.
    9. P. R. Weerathunga & Chen Xiaofang & T. K. G. Sameera, 2020. "Heterogeneity in Earning Management of Listed Companies Following International Financial Reporting Standards Convergence: A Developing Country Experiences," International Journal of Economics and Financial Issues, Econjournals, vol. 10(1), pages 101-108.
    10. Himanshu & Jatinder P. Singh & Ashwani Kumar, 2020. "Prioritizing and Establishing Cause and Effect Relationships Among Financial Reporting Quality Metrics," Vision, , vol. 24(3), pages 330-344, September.
    11. Susana Callao & José Ignacio Jarne, 2010. "Have IFRS Affected Earnings Management in the European Union?," Accounting in Europe, Taylor & Francis Journals, vol. 7(2), pages 159-189, December.
    12. Hong, Philip K. & Paik, Daniel Gyung & Smith, Joyce Van Der Laan, 2018. "A study of long-lived asset impairment under U.S. GAAP and IFRS within the U.S. institutional environment," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 31(C), pages 74-89.
    13. Bajra, Ujkan & Čadež, Simon, 2018. "Audit committees and financial reporting quality: The 8th EU Company Law Directive perspective," Economic Systems, Elsevier, vol. 42(1), pages 151-163.
    14. Marco Fasan & Carlo Marcon, 2018. "Accounting Choice under IFRS: The Role of Accounting Tradition and Managerial Opportunism," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 8(3), pages 209-223, July.
    15. Karampinis, Nikolaos I. & Hevas, Dimosthenis L., 2013. "Effects of IFRS Adoption on Tax-induced Incentives for Financial Earnings Management: Evidence from Greece," The International Journal of Accounting, Elsevier, vol. 48(2), pages 218-247.
    16. Hui-Sung Kao, 2014. "The relationships between IFRS, earnings losses threshold and earnings management," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 12(1), pages 81-98, February.
    17. Dinh, Tami & Schultze, Wolfgang, 2022. "Accounting for R&D on the income statement? Evidence on non-discretionary vs. discretionary R&D capitalization under IFRS in Germany," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 46(C).
    18. Guillaume Dumas, 2012. "Le Comportement Myopique D’Investissement En R&D : Une Realite En France ?," Post-Print hal-03948465, HAL.
    19. Tahinakis, Panayiotis D., 2014. "R&D expenditures and earnings management: Evidence from Eurozone countries in crisis," The Journal of Economic Asymmetries, Elsevier, vol. 11(C), pages 104-119.
    20. Martin Walker, 2013. "How far can we trust earnings numbers? What research tells us about earnings management," Accounting and Business Research, Taylor & Francis Journals, vol. 43(4), pages 445-481, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:ijodag:v:13:y:2016:i:2:d:10.1057_jdg.2015.14. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.