An Analysis of Methods Used in Accounting for R&D Costs

Abstract

While U.S. GAAP and Japanese accounting standards mandate that firms fully expense R&D costs when they are incurred, International Financial Reporting Standards (IFRS) allow partial capitalization of R&D costs. The companies in Japan to which IFRS applies presumably capitalize of R&D costs.

This study therefore investigated the suitability of accounting treatment for R&D costs for each industry using an empirical analysis of data from Japanese companies. The results suggest expensing of R&D costs in the chemicals, machinery, and precision instruments industries, and partial capitalization of R&D costs in the pharmaceuticals, automobiles, and electric machinery industries. I infer that the proportion of R&D costs being eligible for capitalization is higherin pharmaceuticals, automobiles, and electric machinery industries than in other industries.