Country-level corruption and accounting choice: research & development capitalization under IFRS

Mazzi, F., Slack, R., Tsalavoutas, I. and Tsoligkas, F. (2019) Country-level corruption and accounting choice: research & development capitalization under IFRS. British Accounting Review, (doi:10.1016/j.bar.2019.02.003) (Early Online Publication)

Mazzi, F., Slack, R., Tsalavoutas, I. and Tsoligkas, F. (2019) Country-level corruption and accounting choice: research & development capitalization under IFRS. British Accounting Review, (doi:10.1016/j.bar.2019.02.003) (Early Online Publication)

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Abstract

International Accounting Standard 38 Intangible Assets mandates that development costs must be capitalized if certain conditions specified in the standard are met. However, this requires managerial judgement and hence may be subject to opportunism. Corruption is a permeable informal country characteristic that penetrates firms' behaviour, influencing corporate misconduct. We conjecture that an environment with high corruption facilitates management in their justification of meeting the capitalization criteria of assets that should have been expensed, either partly or entirely. Effectively, these capitalized assets will not generate the future economic benefits implicitly conveyed by their recognition. This recognition, however, sends positive (albeit distorted) market signals for future earnings and increases current year reported earnings. We find that there is a positive relation between country-level corruption and the amount of development costs capitalized in a given year. Moreover, the higher the levels of country corruption, the lower the contribution of capitalized development costs in a given year to future profitability. Finally, this association is moderated by companies’ levels of internationalization.

Item Type:Articles
Status:Early Online Publication
Refereed:Yes
Glasgow Author(s) Enlighten ID:Tsalavoutas, Dr Ioannis and Tsoligkas, Mr Fanis
Authors: Mazzi, F., Slack, R., Tsalavoutas, I., and Tsoligkas, F.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:British Accounting Review
Publisher:Elsevier
ISSN:0890-8389
ISSN (Online):1095-8347
Published Online:18 February 2019

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