New accounting standards, namely SFAS 141 and 142, were adopted in 2001. The release of these two regulations offers a unique opportunity to explore how managers have changed their earnings manipulation behavior by using IPR&D costs. In this study, we examine whether and how the amount of IPR&D at the acquisition deals is associated with discretionary accruals, which serve as a proxy for earnings management. We use a sample of firms reporting acquired IPR&D over the period of 1993 to 2007 with a matched group based on size and industry. Our results provide evidence that managers strategically use the IPR&D costs as an income-decreasing earnings management tool, and SFAS 141 and 142 effectively reduced the use of IPR&D cost to manipulate earnings. Furthermore, we examine the effect of SFAS 141R which was adopted in 2008, on earnings management by using IPR&D. We use a sample of firms reporting acquired IPR&D at the firm level over the period of 1993 to 2011 with a matched group based on size and industry. Results indicate that IPR&D is no longer related to income- decreasing earnings management after the adoption of SFAS 141R. These findings can help accounting regulators determine how to curb the misleading use of IPR&D for earnings management purposes.

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This is the pre-peer reviewed version of the following article: Paik, Daniel Gyung H., Kevin Kim, June Y. Lee, and Eun S. Lee. “Acquired R&D Allocation and Earnings Management.” Australian Accounting Review (Volume 28, Issue 1, December 2018 pp. 577-588), which has been published in final form at DOI: 10.1111/auar.12210. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.

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