Preparers’ and auditors’ views on the accounting for development costs capitalisation: an ambiguity aversion perspective

Purpose Research and development (R&D) is characterised by an ambiguous information environment where future outcomes are unknown. While archival studies document a relative prevalence of expensing development costs, this study explores the views of preparers and auditors on the accounting for the capitalisation of development costs under International Accounting Standard (IAS) 38. Design/methodology/approach Semi-structured interviews were held with 11 preparers and 10 auditors as key actors in the supply of financial reporting information. All had substantial experience in accounting for R&D. Interviewees were drawn from a range of countries reporting under International Financial Reporting Standards, which could help minimise potential bias arising from country-specific factors. An iterative interpretative thematic approach was followed for the analysis of the interview data employing ambiguity aversion. Findings Preparers and auditors portray a tendency to expensing. This finding is consistent with ambiguity aversion where individuals act as if they take a worst-case outcome and a fear of negative evaluation regarding future impairments. Moreover, this sheds light on the findings of archival studies as to a relative lack of capitalisation. Further, the findings show that the accounting treatment of development costs can be viewed as being a dialogic social construction between preparers and auditors. Practical implications This research raises important policy implications and informs the International Accounting Standards Board's (IASB) current project to comprehensively review IAS 38. Originality/value The findings advance the financial accounting literature in relation to R&D and the consideration of ambiguity and ambiguity aversion in accounting practice. Prior accounting-related studies considering ambiguity have primarily adopted an experimental design often in a training environment with students. In contrast, this research directly reports the views of highly experienced auditors and preparers regarding a key and highly topical, accounting issue.