The Impact of Sec Scrutiny on Financial Statement Reporting of In-Process Research and Development Expense
Posted: 20 Feb 2004
We document the effect of SEC scrutiny on how firms report in-process research and development costs (IPRD), and investigate an important but previously unexamined means by which the SEC can influence financial reporting - oversight from the Office of the Chief Accountant, and the review and comment process in the Division of Corporation Finance. We examine restatements of previously expensed IPRD following the 1998 guidance provided by Chief Accountant Lynn Turner, who communicated his opposition to "excessive write-offs of In-Process Research and Development costs," and Chairman Arthur Levitt, who voiced his concerns about earnings management.
Restatements reduce IPRD expense by 62 percent on average, and increase pre-tax income by 142 percent, with a median change of 32 percent. As well, in a sample of 582 acquisitions accounted for as purchases that included IPRD in SIC industry 737 (computer programming and software), mean IPRD charges as a percentage of assets acquired shrank 71 percent in the years following Chief Accountant Turner's guidance. The results demonstrate the potent impact SEC opinions about proper accounting practice can have on registrants' financial reporting, even when the agency is not formally setting new standards.
Keywords: In-process research and development cost, R&D, SEC, review and comment process, restatements
JEL Classification: G34, G38, L50, M41, M44
Suggested Citation: Suggested Citation