The Value Relevance of Accounting in R&D-Intensive Firms: A qualitative study of accounting relevance in R&D-intensive firms and what information is conisdered relevant by CFOs

Abstract

This master thesis aims to investigate how relevant accounting is for R&D-intensive businesses, and what information is or could be used to compensate for the reduced relevance over the years. There is a wide agreement that accounting for intangible assets is still an unresolved problem, as there is only one existing IFRS standard, IAS 38 – Intangible Assets – that covers the accounting treatment for these assets. This standard has a “one solution fits all” for the different kinds of intangible assets, and this thesis will explore if there is a need for a different way to present information regarding R&D. This study differs from most value-relevance studies in that this is a qualitative study with an explorative approach, rather than quantitative studies measuring how accounting information affects share prices. This is done to gain a deeper understanding of the current challenges of accounting in R&D and intangible intensive industries. The data collected in this study comes from interviewing industry professionals who are responsible for the annual report. These industry professionals consist mostly of CFOs. These individuals have experience in working with the annual report and in providing relevant information to the capital markets, and therefore has practical knowledge of R&D accounting. The study first aims to understand how relevant CFOs believe their respective financial statements are. Further, it seeks to understand the challenges of providing adequate accounting information on R&D. We later investigate what the CFOs believe is the appropriate or more suitable way to provide relevant information on R&D, as strict accounting rules prohibit them to capitalize these amounts. Our study has resulted in several interesting findings. First, our study may indicate that the comprehension level of IFRS and accounting standards is low among CFOs. Second, we find that there seems to be an overstated emphasis on capitalizing R&D costs in the balance sheet, as most view accounting information on R&D to be relevant in other section of the financial statements. Lastly, our findings indicate that most R&D intensive firms are more dependent on the management report, rather than the financial statements.