R&D Accounting and the Tradeoff Between Relevance and Objectivity |
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Authors: | Paul M. Healy,Stewart C. Myers,& Christopher D. Howe |
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Affiliation: | Harvard Business School,;MIT Sloan School of Management |
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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. |
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