Value relevance of R&D in the UK after IFRS mandatory implementation

Abstract

Following International Financial Reporting Standards (IFRS) mandatory adoption in 2005, the criteria determining the accounting treatment of Research and Development (R&D) expenditure have changed for UK listed companies that publish consolidated financial statements. Therefore, recent literature raises concerns about the value relevance of R&D assets and expenses in the UK, after 2005. Using very recent data, we respond to these calls for research. Adding to the absence of prior evidence regarding the pre-IFRS period, we find that the capitalized portion of R&D is significantly positively related to market values, suggesting that the market perceives these items as successful projects with future economic benefits. R&D expenses are significantly negatively related to market values under IFRS, supporting the proposition that they reflect no future economic benefits and thus they should be expensed. Also in contrast with evidence regarding the pre-IFRS period, R&D expenses are negatively value relevant only for large companies. Accordingly, we argue that transition to IFRS does have implications on the valuation of R&D expenditure in the UK.