Expense or Capitalize R&D – SFAS 2 Revisited

Abstract

FASB’s Statement of Financial Accounting Standard No. 2 requires that most of the expenditures incurred in Research and Development Activity be expensed in the period incurred. Expensing a long term asset understates assets and understates true income for a firm in the period, and if R&D activity is material then the users of financial statements are misled into making non-optimal decisions regarding investment and lending to such firms. This paper presents arguments for recording of R&D expenditures as creation of an asset and suggests time periods over which this asset may be amortized. Cross-lagged panel technique is used to infer the direction of causality.

Keywords: Research and Development, causality, cross-lagged panel