In-process strongRstrongD To capitalize or expense.pdfVIP

J. Eng. Technol. Manage. 23 (2006) 18–32 /locate/jengtecman In-process RD: To capitalize or expense? Zhen Deng a, Baruch Lev b,* a Baruch College, City University of New York, New York, NY, USA b Stern School of Business, New York University, 44 West Fourth Street, Suite 10-92, Kaufman Management Center, New York, NY 10012, USA. Available online 9 March 2006 Abstract The FASB recently proposed the capitalization of acquired in-process RD costs to replace the current practice of expensing this item. This proposal will likely be strongly opposed by corporate executives. We examine whether in-process RD is an asset worthy of capitalization or an expense, and, if it is an asset, how reliable is its estimate. We find a significant association between the values of in-process RD and acquiring firms’ cash flows during the 3 years subsequent to acquisition, thereby supporting the FASB’s proposal to recognize in-process RD as an asset. Preliminary tests are positive for the reliability/objectivity of in- process RD estimates. # 2006 Elsevier B.V. All rights reserved. JEL classification: G34; M41; 03 Keywords: RD; Capitalization; Cashflows; Intangibles 1. Introduction The in-process research and development (IPRD) phenomenon came to the public’s attention in the mid-1990s, when a substantial number of leading companies, particularly in the high tech and science-based sectors, announced corporate acquisitions in which incomplete RD projects constituted the major asset acquired. What raised eyebrows and triggered the media’s attention was the fact that, following an arcane accounting rule, the acquiring firms immediately expensed the just-recognized value of IPRD, thereby writing