Is AASB138 a catalyst for management to reduce research and development spending?

What is it about?

This study investigates if the more stringent requirements of AASB138, effective 1 January 2005, regarding capitalising research and development (R&D) spending could have been a catalyst for changes in managerial decisions that consequently resulted in reduced R&D spending in Australian companies. The pursuit of choosing short-term earnings targets to the detriment of long-term returns is referred to as short-termism. This study found a marked increase in the significance of short-termism in explaining changes in R&D of capitalisers before 2005. Furthermore, the median research intensity ratio of capitalisers declined almost three times that of non-capitalisers after the introduction of AASB138. These findings suggest that AASB138 could have been a catalyst for changes in managerial decisions in pursuit of short-termism, resulting in reduced R&D spending as a means to manage earnings.

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Why is it important?

This study is useful to standard setters and board of directors as it alerts them about the potential adverse effect AASB138 might have on the survivability and competitiveness of Australian companies and hence the Australian economy.

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