Accounting for intangible assets

Corresponding author:
Florian Ther

Co-authors:
Prof. Dr. Brigitte Eierle

Duration:
since April 2015

Funders:
Fraunhofer Institut für Integrierte Schaltungen (Fraunhofer IIS)

Subproject 1

Corporate Finance and the Determinants of Capitalizing Development Costs – Insights from German Private Firms


Abstract:

We examine the determinants of private firms’ decisions to capitalize development costs voluntarily under German GAAP, conditional on their financing structure. Using survey data from 495 German private firms, we find that the option to capitalize development costs is used if information asymmetries to capital providers are high. Additional tests show that private firms’ efforts to stay informationally opaque with relationship lenders reduce their capitaliza-tion likelihood. Contrary, higher bank debt and benchmark beating incentives form key capital-ization drivers for private firms engaging in transaction lending. Conversely, private equity financing is a main driver for firms’ capitalization decisions.

 

Corresponding author:
Annika Brasch

Co-authors:
Prof. Dr. Brigitte Eierle
Prof. Robin Jarvis (Brunel University London)

Duration:
since January 2017

Subproject 2

Capitalising or Expensing Development Costs? – Mixed Methods Evidence on the Determinants and Motives of UK Private Companies’ Accounting Policy


Abstract:

Following a mixed methods approach, our study evaluates the motives behind private companies’ decisions to capitalise development costs. We examine whether or not this accounting option is used in an opportunistic manner and if size classification leads to different accounting treatment. Archival analysis indicates that private firms capitalise development costs to meet pre-defined benchmarks and ameliorate poor profitability. Additionally, expert interviews’ evidence emphasises that debt covenant violation avoidance as well as increasing merger and acquisition (M&A) values are important drivers for capitalising firms, whereas management compensation schemes do not seem to influence private companies’ capitalisation decisions. Moreover, both quantitative and qualitative findings imply a negative association between firm size and the capitalisation of development costs. Our expert interview findings indicate that smaller companies are more likely to have financing needs, suggesting that development costs capitalisation is employed by these firms to signal future economic benefits to potential investors. Conversely, the underlying motivation for larger companies which are more likely to expense may be grounded on risk avoidance from future impairments.

 

Corresponding author:
Annika Brasch

Co-authors:
Prof. Dr. Brigitte Eierle
Prof. Robin Jarvis (Brunel University London)

Duration:
since January 2017

Subproject 3

R&D Investments, Development Costs Capitalization and Credit Ratings – Evidence from UK Private Firms


Abstract:
This study investigates R&D, specifically the relationship between development costs capitalization and private companies’ credit ratings. Results indicate that uncertainty surrounding R&D investment is to the fore in private companies’ credit risk assessment and R&D intensity does, therefore, have a negative impact on their credit ratings. Although credit rating assessors are generally more concerned about downside risks, they seem to take into account different degrees of uncertainty. Consequently, findings reveal that capitalized development projects which signal highly likely future economic benefits lead to better creditworthiness. Moreover, we infer from our additional analysis that credit rating assessors do consider companies’ motivations to capitalize development costs, since we find evidence that discretionary capitalization ratios employed for opportunistic earnings management reasons have a significantly negative association with private companies’ credit ratings. Conversely, non-discretionary counterparts have a significantly positive effect. Indeed, in line with these findings, we additionally document that only those capitalization ratios which are not related to earnings management motives positively influence private companies’ future profitability.

 

Completed and already published subprojects

Corresponding author:
Andreas Kreß

Co-authors:
Prof. Dr. Brigitte Eierle
Ioannis Tsalavoutas (Stirling University, Glasgow)

Durration:
since April 2015

Funders:
Fraunhofer Institut für Integrierte Schaltungen (Fraunhofer IIS)

Subproject 4

Development costs capitalization and debt financing

Abstract:

This study investigates debt market effects of research and development (R&D) costs capitalization, using a global sample of public bonds and private syndicated loans issued by public non-financial firms. Firstly, we show that firms capitalize larger amounts of R&D in a year when they exhibit a propensity for issuing bonds, rather than borrowing funds privately from the syndicated loan market, in the subsequent year. Secondly, we provide evidence that capitalized R&D investments reduce the cost of debt. We infer that debt market participants are able to identify firms’ motives for R&D capitalization, as we find a reduction in the cost of debt only for those firms that do not show indications of employing R&D capitalization for earnings management reasons. Indeed, only for this sub-sample of firms, the amount of capitalizedR&Dcontributes positively to future earnings.We confirm that R&Dcapitalization is positively associated with audit fees and thus can be deemed to be a signaling device. Lastly, we find that it is the amount of R&D a firm is expected to capitalize and not the discretionary counterparts, which facilitates a firm's access to public debt markets, reduces bond and syndicated loan prices, and contributes to future benefits.

 

Further already completed, published subprojects

  • Kreß, A./Eierle, B./Tsalavoutas, I.(2019): Development costs capitalization and debt financing, in: Journal of Business, Finance and Accounting (JBFA), Jg. 46, Heft 5-6, S. 636-685, abrufbar unter: https://onlinelibrary.wiley.com/doi/epdf/10.1111/jbfa.12370.
  • Kreß. A./Eierle, B./Tsalavoutas, I. (2019): Development costs capitalization and debt financing, in: Journal of Business, Finance and Accounting (JBFA), Jg. 46, Heft 5-6, S. 636-685
  • Eierle, B./Kreß, A./Ther, F. (2019): Die Abbildung der Digitalisierung in der externen Finanzberichterstattung von kapitalmarktorientierten Unternehmen, in: Geschäftsmodelle in der digitalen Welt (2018), hrsg. von Becker et al., Wiesbaden 2018, S. 415-434.
  • Eierle, B./Ther, F./Kreß, A. (2019): Die Abbildung der Digitalisierung in der handelsrechtlichen Finanzberichterstattung nicht kapitalmarktorientierter Unternehmen in Deutschland, in: Geschäftsmodelle in der digitalen Welt (2018), hrsg. von Becker et al., Wiesbaden 2018, S. 435-458.
  • Eierle, B./Ketterer, S./Brasch, A. (2018): Wertorientierte Steuerungsgrößen im Kontext zunehmender Bedeutung immaterieller Werttreiber in der Unternehmenspraxis, in: Wertschöpfung in der Betriebswirtschaftslehre, Festschrift für Prof. Dr. habil. Wolfgang Becker zum 65. Geburtstag, Wiesbaden 2018, S. 385 – 407.
  • Eierle, B./Ther, F. (2018): Die bilanzielle Behandlung von Entwicklungskosten in der handelsrechtlichen Finanzberichterstattung – Ergebnisse einer Befragung nichtkapitalmarktorientierter Unternehmen in Deutschland, in: Der Betrieb, 71. Jg., Heft 30, S. 1741-1747.
  • Eierle, B./Wencki, S. (2016): The Determinants of Capitalising Development Costs in Private Companies – Evidence from Germany, in: Journal of Business Economics, 86. Jg., Heft 3, S. 259-300.
  • Dinh, T./Eierle, B./Schultze, W./Steeger, L. (2015): Research and Development, Uncertainty, and Analysts' Forecasts: The Case of IAS 38, in: Journal of International Financial Management & Accounting, Jg. 26, 2015, Heft 3, S. 257-293.

Pictures