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Were In‐Process Research and Development Charges Too Aggressive?

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  • Thomas D. Dowdell
  • Steve C. Lim
  • Eric Press

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.

Suggested Citation

  • 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.
    • Handle: RePEc:bla:jbfnac:v:36:y:2009:i:5-6:p:531-551
    DOI: 10.1111/j.1468-5957.2009.02155.x
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    References listed on IDEAS

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    1. 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.

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