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Accounting Treatment Of Research And Development R D Accounting Essay

Accounting treatment of research and development (R&D) charges is a controversial concern since the way of taking into account these fees can often be motivated by bonuses to handle the final results.

The results of the analysis derive from an example of French companies listed and quoted in the financial market: Indeed, this research examines the amount to that your decisions of the firms to capitalize or not the charges of the R&D can be influenced by motivations to manage cash flow. The French framework presents a good example to check our assumptions, as the PCGR in France supplies the potential of choosing between capitalizations and expensing R& D charges.

By utilizing a logistic regression model, we find out that the French quoted companies have a tendency to use the capitalization of the R& D expenditures to be able to steady the results, as well as, to avoid any violation of the obligations restrictive clauses.

Keywords: R&D accounting, profits management, revenue smoothing, debt covenants, French companies.

1 Introduction

The changeover from an industrial economy to a knowledge economy has improved just how of taking into account the economical, accounting and stock market valuation of this new field. Intangible property end up being the key resources of progress and competitive border for companies and industries. Regarding to Penman (2009), the success of the best firms on the market is essentially because of its knowledges assets: "Microsoft Corporation", which uses a huge amount of intangible belongings and the fantastic "Dell Inc. . . ", based on a significant organizational capital (Lev et al. , 2009) are a few instances to demonstrate it.

Studies show that investment in R & D is considered as an important form of investment in technology-in evaluation to other intangible investments (Karl-Heinz, 2005). Companies have spent substantial sums in R & D during the last two decades to generate future economic benefits to different stakeholders in the organization. Indeed, in the framework of European countries 2020 strategy, Western Commission released in July 2010, a total of 6400 million Euros will be allocated to invest in research and invention (Eurostat, 2010)1

A firm cannot compete in this new environment unless it becomes more ground breaking and responds more effectively to consumers needs and preferences. Beyond the economic and financial valuation of assets in R & D, management accounting research has centered on understanding particular problems from an accounting point of view. The complexity of accounting treatment of R & D expenditures and the diversity of opinions upon this subject have led to variations in accounting methods on the planet.

The majority of studies centered on the relevance side of accounting decision about R&D expenses, while few ones have focused on the reliability area and more specifically the possibility of using the R&D expenditures as a way of income management. Banal and Stadler (2010) have exhibited significant discretion in the decision of R & D projects and their accounting treatment.

The issue of management discretion and its effect on the investment decisions has probably an important impact on what sort of accountants should consider:Indeed, a debate has been raised recently in the convergence project between U. S. GAAP and IAS / IFRS. If our research would be able to demonstrate that the capitalization of R & D is often influenced by motivations to control the results, it'll support the current position of U. S. GAAP (USA), which requires a stricter approach and requires that all R&D expenses should be expensed in today's period. Instead, if research reveals that companies dont use R&D accounting treatment for earnings management purposes, it will support the positioning of IAS/IFRS under which the capitalization of R&D expenditures is certified under certain conditions.

This paper goals to donate to the understanding of R & D accounting tactics in the French context since French accounting regulation has given professionals considerable flexibility about the accounting treatment of R&D expenditures: Indeed, each actor try to protect its specific advantages, it'll therefore try to use its position to maximize income (Syed et al. , 2009). Hence, professionals, holding an informational hire, can benefit from the flexibility of R&D accounting regulation in France.

The paper proceeds as follows, section 2 introduces theoretical foundations of research, section 3 presents the regression model and the research strategy. Finally, section 4 reveals the results and section 5 concludes the analysis.

2 Theoretical foundations

2. 1 R & D accounting treatments

2. 1. 1 The international accounting differences

"Everyone thinks that harmonization will happen one day, but apparently no-one believes it will happen in his or her life-time"2 (Philip R. Lochner, Jr. , a previous commissioner of the Securities and Exchange Commission in the USA).

The capitalization of R&D expenditures is definitely a controversial accounting issue. International Accounting Requirements discuss accounting for R&D expenses in IAS No 38 (IASB, 2004 a, b). Paragraph 54 of this standard expresses that research expenditures shall be expensed in the income affirmation. Concerning development expenses, paragraph 57 says that an intangible asset arising from development, must be contained in the balance sheet if some conditions are respected.

However, U. S. GAAP adopts a stricter approach to the problem:Indeed, the Financial Accounting Standards Board (FASB), which certified an initial time activation of R & D expenditures, implemented in October 1974 another approach stipulating that all R & D costs must be immediately expensed regarding to SFAS No. 23 (FASB, 1974, paragraph12). Really the only exception to the full expensing guideline is explained in SFAS No. 864 which is related to the activation of your software development expenditures (FASB, 1985). The identical approach was adopted in 1998 by the business enterprise Accounting Deliberation Council (BADC), obliging all Japanese businesses to expense almost all their R & D expenditures. However, for the case of Italian or French options, the decision to capitalize or charge R&D expenses is a management choice. Its countrywide accounting standards permit the capitalization of R & D expenditures when certain conditions are fulfilled5. A similar approach is applied for United kingdom and Canadian firms which check out the activation of R&D under certain conditions and therefore their depreciation. However, Germany is seen as a the absence of publication of total annual financial assertions -except in an IPO- doesnt really acknowledge the concept of intangible assets, specially the R & D whose activation is prohibited.

2. 1. 2 R&D accounting treatment in France for shown companies

Since 2005, all stated companies in the European Union (EU) countries have been obliged to get ready their annual reviews in accordance with international criteria (IFRS / IAS). The revised IAS 38 distinguishes between a "research phase" and a "development phase". Expenditures on research should be expensed: IAS 38 ( 55) considers that during the research phase of a project, a company cannot demonstrate an intangible asset will create or not probable future monetary benefits.

Assets arising from research (or from the research phase of an internal project) shall be recognized. Expenditure on research (or on the study phase of an interior project) shall be recognized as a cost when it occurs.

An intangible asset arising from development (or from the development phase of an interior project) shall be accepted if and only when an entity can show all of the following:

(a) The complex feasibility of doing the intangible advantage such that it will be available for use or sales.

(b) Its intent to complete the intangible property and use or sell it.

(c) Its capacity to use or sell the intangible advantage.

(d) How would theses property generate possible future economical benefits? Among other activities, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it's to be used internally, the effectiveness of the intangible asset.

(e) The option of adequate complex, financial and other resources to complete the development and also to use or sell the intangible asset.

(f) Its capacity to assess reliably the costs due to the intangible property during its development "(IASB, 2009).

Conditions explained by the French accounting standards are similar to those mentioned by IAS for development costs. The only difference between French GAAP and IAS/IFRSlies intheobligation ofcapitalization of R&D expenses, if the conditions stated above are satisfied. Contrary to IAS, People from france GAAP do not require capitalization of R&D expenditures when these conditions appear, leaving versatility for the managers.

2. 2 Books review and research hypotheses

Previous studies have recommended four main incentives for earnings management, derived from the positive of accounting theory. The first drive concerns the debt-covenant, the second incentive is to lessen the variability of results by the management to increase or lower profits in order to minimize the risk taken by buyers: we speak in this case about revenue smoothing, the third inspiration concerns the reduced amount of political costs, and lastly the bonus programs.

In this review, we focus only on the first three incentives due to limited disclosure6 of data on the lifestyle and structure of the benefit plans by French companies.

2. 2. 1 Debt-covenant restrictions

The research of debt-covenants as a determinant of accounting choices suggests that professionals should enjoy the versatility of requirements by implementing the accounting alternatives that permit them to avoid violating restrictive debt-covenants, more specifically methods that increase results (Garen et al. , 2008). This is actually the circumstance for R & D expenditures because the way that R & D accounting treatment allows overall flexibility in the choice between capitalizing and expensing. Thats why, more leveraged companies should become more encouraged to activate their R & D costs somewhat than expensing them (Landy and Callimaci, 2002; Finet et al. , 2005). In the same way, matching Btriou and Vignolles (1990), activation of R & D diminishes the financial leverage, which creates a motivation for highly leveraged companies to choose the activation alternatively than expensing. Aboody and Lev (1998) also claim that a high level of debt could push a company to capitalize on its R & D expenses, because this choice allows the company to improve its accounting income and decrease its arrears ratio.

In France especially, restrictive credit debt covenants ratios are calculated from accounting results, degree of debt and financial expenditures. Therefore, highly leveraged organizations may be inspired to make income-increasing accounting decisions (Shea, 2002). Companies that switch on their R & D will move away from the boundary violation of "debt covenants". Thus, our first hypothesis is produced the following:

H1. The likelihood of capitalizing R & D expenditures is positively related to the leverage ratio.

2. 2. 2 The variability of results

The income-smoothing hypothesis suggests that a professionals accounting discretion is led by his desire to lessen the variability of results (Fudenberg and Tirole, 1995). The smoothing process is utilized to average the fluctuations in results in one year to some other by transferring the benefits from peak years to less successful intervals (Garen et al. , 2008). Trueman and Titman (1988) examine the factors that stimulate managers to manipulate posted results and conclude that managers can enhance the market valuation of the company by smoothing the leads to reduce the peaks and make versions of results less volatile. These authors demonstrate that firms smooth their income because they want investors to notice that the business shows a good performance and a lesser risk, thus leading to lower cost of capital for the business.

The political costs are also regarded as an important motivation for cash flow smoothing (Watts and Zimmerman, 1986; Cahan, 1992; Godfrey and Jones, 1999). Revenue smoothing diverts political aims; in truth, excessively high earnings draw in such attention from federal and duty services. Such concerns will come from employees concerned about the future career prospects, suppliers and customers who have a tendency to evaluate the future steadiness. Another major explanation of profits smoothing has been from the remuneration of your manager and its concerns about job security, Fudenberg and Tirole (1995) predict that earnings smoothing occurs because the manager increases published cash flow in difficult periods to increase the possibility of keeping their job and will decrease printed income in good periods.

Smoothing results were seen both as an optimistic strategy that allows professionals to provide information to private buyers (Tucker and Zarowin, 2006) so that a manipulative practice which is conducted for opportunistic purposes (Garen et al, 2008).

In this review, we didn't intend to defend either of the two views. Our main aim is to check whether the accounting treatment of R & D is used for revenue smoothing. Nelson et al. (2003) showed that the accounting treatment of the costs is one of the most frequent profits management strategies. Therefore, we estimate that companies have a tendency to capitalize their R & D expenditures when their operating profitability (before capitalization of R & D) is lower to that of modern times, while they have a tendency to expense the costs of R & D when their operating profitability is higher to that of recent years. Likewise, Garen et al (2008) have shown through their research on 130 Italian companies for the years 2001, 2002 and 2003 that is a negative romance between variability of changes in income and capitalization of R & D. We formulate the hypothesis the following:

H2. The positive variability of results reduces the probability of capitalizing R & D expenditures.

2. 2. 3 The politics costs

According to Watts and Zimmerman (1986), the politics cost hypothesis predicts that large firms will be supervised than small companies, due to high results which may be generated.

Agreeing with the positive accounting theory, the political visibility is often correlated with the political costs (W and Zimmerman, 1986). The politics costs are not predicated on an explicit agreement, but they result from the use of accounting information. According to Dufour and Zemzem (2005), governments and politicians are not the one ones who can react. We must also consider actions that may be completed by employees, unions, competition or consumer associations. Indeed, the state can be inferred that the company has a monopoly rent, which comes within antitrust regulation. In the same way, employees or unions will be encouraged to seek a renegotiation of income.

2. 2. 3. 1 Firmsize

Firm size is usually used as a proxy for the politics costs. According to Ben Othman et al. (2006), companies with bigger sizes are more vunerable to incur the pressure of politics costs than smaller ones and are thus subject to greater transfer of riches.

In other words, when a company has a more substantial size, its visibility on the marketplace is larger which is followed by a larger number of analysts.

Regarding the R & D expenditures, nearly all studies preserve size as a "proxy" for politics costs:Indeed, the greater the company is larger, a lot more its capability to donate to the financing of the state of hawaii is high (and Zemzem Dufour, 2005). Governments are therefore looking more to large companies (Aboody and Lev, 1998). Dumontier and Raffournier (1998) proved that size could also be a determinant of the decision of capitalization of R & D. Indeed, the size plays an important role in many accounting options. Matching to Dufour and Zemzem (2005), a company with a sizable size will try to further reduce their results than a little company. It uses that large companies should charge their R & D expenditures through the calendar year (Daley and Vigeland, 1983, Percy, 2000).

For large firms, professionals choose accounting methods that are different the realization of revenue, this means that, they have a tendency to reduce their earnings and for that reason to price R & D costs.

H3. 1 The probability of capitalizing R & D costs is negatively related to the scale.

2. 2. 3. 2 Workers costs

Employees are a central aspect in the system of corporate and business governance. They are believed by many authors such as Charreaux and Desbrires (1998) as providers of business resources and for that reason assign the value created, as well as shareholders, collectors or directors (Nekhili, 2000). The political costs hypothesis predicts that negotiations with employees encourage companies to reduce accounting profits in order to avoid salary needs (Mora and Sabater, 2008):Indeed, in most of firms, income and interpersonal advantages awarded to employees are the main cost incurred during an accounting period (Breton and Schatt, 2003). Therefore, professionals may be enticed to reduce benefits to steer clear of the difficult negotiations with employees or unions (Waterhouse et al. , 1993). The hypothesis of an accounting manipulation prior to wage negotiations has already been tested in the United States by Liberty and Zimmerman (1986) and by D'Souza et al. (2001).

While Liberty and Zimmerman (1986) dont found any evidence that managers use accounting in order to fortify their position in negotiations with employees, D'Souza and al. (2001) have shown the utilization by professionals of discretionary accounting options to impact future negotiations with employees particularly when workers are too associated with unions. Accordingly, salary may lead managers to look at income-decreasing accounting decisions to avoid salary increase demands.

Mora and Sabater (2008) researched an example of Spanish companies to test the politics costs hypothesis, which expresses that managers tend to reduce accounting income to avoid wage increases and other demands from the staff. They found that professionals in Spain reduce accounting profit to avoid potential negotiations with employees. Versatility in R&D accounting treatment can serve this purpose. We test the following hypothesis:

H3. 2 The probability of capitalizing R & D expenditures is negatively related to the salary costs.

2. 2. 4 The industry

Firm industry can be viewed as as a relevant variable to describe the accounting methods (W and Zimmerman, 1986; Zeghal and Ben Othman, 2006):Indeed, companies belonging to the same sector are at the mercy of the same environment and therefore the same pressures (Givoly and Palmon, 1982; Craswell and Taylor, 1992).

Accounting decision about R&D expenditures differs in one sector to some other. The positions occupied by companies that invest in high technology are extremely fragile and assets in technological innovation are incredibly heavy and numerous (Ding et al. , 2004). Hence, it's important to reassure the market on current and future profitability of the business. Capitalization of R & D is a highly effective signal about the near future success of the company. Companies in traditional areas frequently have a regular and stable stream of R & D activity, it is apparent that they price more their R & D expenditures. The results of the analysis by Ding et al. (2004) based on logistic regression, applied empirically on an example of 68 French companies, concur that companies that capitalize R & D bills are the ones that operate in the high technology sector.

H4: The probability of capitalizing R & D expenditures is positively related to its implications in high technology sectors.

2. 2. 5 The quality of audit

The fundamental role of the exterior auditor is to certify the regularity of records and thus ensure conformity with GAAP. An excellent quality of audit reflects usually a weaker earnings management (Ben Othmen and al. , 2006). However, the impact of audit quality on degrees of discretionary manipulation of managers, specifically in their accounting methods for intangible investments is very important, auditors with high audit quality encourage businesses audited by them to communicate their intangible costs to protect their reputation (Bourmont, 2006).

The majority of studies show the positive effect of audit quality on the level of voluntary offer of information about the R & D activities (Bourmont, 2006) and the amount of capitalization of R & D expenditures. We therefore expect that organizations, which auditors have the very best quality of audit, are those whose activation levels of R & D expenses are the highest. On this context, our hypothesis on the quality of audit is created as follows:

H5: The likelihood of capitalizing R & D expenditures is favorably related to the grade of the exterior auditor.

2. 2. 6 Listing on the U. S. market

Some French companies have a dual list France / USA. American accounting rules strictly necessary to expense R & D expenditures. French companies detailed in the United States are not required to follow U. S. GAAP. It is enough for them to document a reconciliation of net income and shareholders equity compared to U. S. GAAP (Statement 20-F). However, to ensure comparability and steadiness of accounting information, the French companies stated on U. S. marketplaces may have a tendency to expense their R & D expenditures, even because of their financial statements ready under French GAAP (Ding et al. , 2004). We test accordingly the following hypothesis:

H6: The probability of capitalization of R & D expenditures may very well be reduced in circumstance of listing over a U. S. market.

2. 2. 7 The stock market performance

The stock market performance of the company was used by Garen et al. (2008) in their review as a control variable for future growth opportunities that affects the choice of accounting the treatment of R & D expenditures. Regarding to Shabou and Taktak (2002), the more the company is engaged in development opportunities the greater it could face more restrictions on its money policy. The managers will target by outcome to avoid these constraints.

H7: The probability of capitalizing R & D expenditures is positively related to the stock market performance of the company

2. 2. 8 The chance (?)

When a corporation has an increased coefficient risk factor "beta", the market requires a increased rate of come back. The business is therefore obliged showing a far more attractive accounting final result. Contrary to the analysis of Garen et al. (2008) on a sample of Italian companies which may have found no significant aftereffect of the adjustable "beta" on the likelihood of capitalizing R & D expenditures, Ding et al. (2004) have proven, through their analysis of the French context, the living of a good and significant marriage between the capitalization of R & D expenses and the coefficient risk "beta" of the firm.

H8: The probability of capitalizing R & D expenditures is positively related to the beta risk.

3 The regression model and research methodology

3. 1 Demonstration of regression model

We use a logistic regression for our analysis:

Yi = ?0+ ?1LEVERAGE+ ?2 ? ROA-2+ ?3SIZE+ ?4PC +?5HI-TECK + ?6QUAL+ ?7LIST-U. S +? 8MB+ ? 9Beta + Ui

LEVERAGE: it is the total debt divided by the total of the resources.

?ROA-2: is the change in return on assets over the average of the last two years.

[ (N-1; N-2)]/ (N-1; N-2); ROA=Operating income/Total belongings.

SIZE: is the natural logarithm of total assets.

PC: Workers Costs, it is measured by:

(Wages and earnings + Sociable security charges) / Variety of employees

HI-TECH: is a dummy varying that takes the value of just one 1 if the organization belongs to a high-technology sector and 0 in any other case.

QUAL: a dummy changing that takes the worthiness of just one 1 if one of the company is audited by one of the Big 4 and 0 otherwise.

LIST-US: a dummy adjustable that takes the value 1 if the business is listed on a U. S. market (NYSE or NASDAQ) and 0 if the company is not shown over a U. S. market.

MB: is the marketplace value of the company divided by the reserve value.

BETA: is a sensitivity coefficient of the investments returns to the market returns. It is from data bottom "Thomson One Banker (TCS)" and corresponds to the partnership between changes of stock prices during a period of 23 to 35 consecutive weeks and the development of a local index:

3. 2 Research Methodology

3. 2. 1 Sample Selection

Our sample is composed of French companies shown on the Euro-next Paris7 observed in the years 2007 and 2008.

To create our sample, we hand-collect as primary population a group of French companies listed on Euro next Paris in 2005-2006-2007-2008. The initial sample included 125 companies including those rated among the very best 100 in European countries such as: Sanofi Aventis (3), Alcatel Lucent (9), PSA (14), and Renault (15).

The choice of France as the country source of the sample is not arbitrary; it can be justified by the fact that French plan is more and more increasingly in favor of innovation. According to figures of the newspaper "Monitor International Trade, " France is the 10th member express of europe (EU) the most innovative. Total R & D expenditures of French companies in relation to GDP are in seventh place (1. 31% of GDP) in the European union (Samuel, 2009).

Similarly, the French context is very favorable to review the incentives of capitalization of R & D expenditures. Indeed, the French regulatory environment is very advantageous to "earnings management", as it offers some overall flexibility regarding to the accounting decision of R & D expenditures, because the two accounting treatments are allowed.

Finally, the choice of country of the sample was dictated by practical reasons related to the option of information and the capability to have and understand total annual reports.

3. 2. 2 Collection, purification and comprehensive description of the info sample

3. 2. 2. 1 Data collection

To accomplish that research, accounting data have been collected jointly from gross annual reviews of companies in the test, information available in the Western scoreboard and the data source "Thomson One Banker (TCS)8": Information concerning the capitalization of R & D twelve-monthly reports is gathered fromfirms. Data for the years 2007 and 2008 regarding the market capitalization of the firms, their market sectors and the amount of employees can be found on the European scoreboard prepared by the Common Center of Research and directorate-general of European Research Payment(the dashboard of commercial R & D is completed in 2009 2009, it reports the movements of the companies and reports the top 1000 of companies in European countries, according to their shelling out for R&D in Europe and the same on earth). Data for the years 2007 and 2008 relating to total debt, workers costs, net income and quality of the auditor were gathered from annual accounts of the companies. This is also the truth for data relative to operating earnings and total resources for the years 2005-2006-2007-2008 to analyze the variant of ROA2008and ROA2007relative to the average of two past years. Finally, the information relative to the chance "Beta" is available on the data source "Thomson One Banker"

3. 2. 2. 2 Purification of data and description of the sample

We started out with an example of 125 companies. The assessment of their annual reports unveiled that 19 of them dont communicate informations about the capitalization of the R&D, and one of the 106 remaining firms, we were obligated to get rid of 29 ones because there are other lacking data (unavailability of annual reports or some other information). Hence, the ultimate sample includes only 77 companies.

To illustrate our sample in line with the activity of the firms, we will take a rigorous classification of the areas, provided by the British Team of Trade and Industry, which presents a typology of 39 sectors of activities into 3 groups of sectors:

The following desk shows the syndication of our examples businesses by industry and sector group:

Table 1: Circulation of businesses by industry


The presentation and data research will be done at three levels:

* Uni-variate analysis

* Bi-variate analysis

* and a multi-variate analysis

4. 1 Uni-variate analysis

The description of the sample requires the division of the 130 observations9(years-firms) in two categories:

G1: The group G1 is composed of observations that correspond to your choice of capitalizing R&D costs.

G2: The group G2 is composed of observations that correspond to the decision of charge R&D costs.

Means and standard deviations related to independent parameters like metric (or ongoing ones) and the frequencies of the dichotomous parameters are presented in Dining tables 2 and 3.

Table 2: Means and standard deviations for constant independent variables

Continuous variables

Table 3: Regularity of dichotomous self-employed variables


To test dissimilarities between means, the normality of the distribution of observations for every metric variable must be examined. The Kolmogorov-Smirnov test (K-S), handled on six factors, confirmed that only two factors are normally distributed (leverage and risk)10. The test of dissimilarities between means for these two variables in the two groups was not significant11.

Two non-parametric checks were performed: The first is the Mann-Whitney test12, run on four constant variables, which proved that only the changing "Size" was noticed statistically significant at level of 1% (Z =- 3. 007, sig = 0. 003). This consequence confirms the political costs hypothesis(H3. 1)that expresses:"the likelihood of capitalizing R&D costs is negatively related to size. "

The second is the Chi-square test13, run on the dichotomous variables, the three factors found in the model comes with an important effect on your choice of capitalization of R&D costs.

4. 3 Multi-variate research: the method of logistic regression

The multivariate research method found in this research is the logistic regression:Indeed, this technique we can verify the significance of the impact of parameters on the likelihood of choosing one of both ways: either the capitalization or expensing R&D costs. Some conditions need to be inspected for proper application of the method.

4. 3. 1 Conditions of software of the logistic regression

4. 3. 1. 1 Removal of outliers

From the sample of 154 observations (firms-years) and using the Matlab function"REMOVEOUTLIER", 24 observations were eliminated.

4. 3. 1. 2 The multi-collinearity between variables

The analysis of correlations between your nine factors using the Matlab function"corrcoef"is provided in Desk 4 below.

Table 4: Relationship between 3rd party variables


*Relationship significant at level of 5%

We remember that there is:

-A positive and significant relation at degree of 5% between LEVERAGE and SIZE.

We tested the political costs hypothesis by two factors: the SIZE and PC, unlike the hypothesis of debt-covenant constraints which was assessed by a single varying, which is the debt ratio: So, we choose to get rid of the adjustable SIZE.

- A good and significant relation at degree of 1% between HITECH and Laptop or computer. It is clear that the adjustable PC is considered as a simple variable in our analysis unlike the varying HI-TECH which is a simple control adjustable. We thought we would exclude the adjustable HI-TECH since that selection is dependant on the amount of relevance of the variable against the objectives of our analysis.

-A negative and significant relationship at level of 1% between the quality of the auditor and the risk BETA. A business audited by one of the "BIG FOUR" has always less important risk on the market: Indeed, the traders grant more confidence for organizations audited by one of the "BIG FOUR ". In cases like this we select the varying "QUAL", since we are more interested in knowing the impact of the quality of the auditor in the decision of accounting for R&D costs.

4. 3. 2 Display and interpretation of results of logistic regression

Table 5: Display of results

Independent Variables

The "Hosmer-Lemeshow" test of goodness-of-fit, known as the most robust test for the truth of logistic regression, observed a degree of significance equal to 0, 995, which is well above 0, 05. So, the distance between what is observed and what is expected by the model is really small, which indicates a good fit to the info.

To check the strength of connection of the model, we have to consider the coefficient R2of Nagelkerke. In our circumstance, the pseudo R-squared of 22, 8%, which is known as satisfactory in comparison to other studies in the same area, suggests that the model explains 22. 8% of the variance in the centered variable "capitalization of R&D" costs.

Finally, to examine the predictive capability of the logistic model, we founded a classification stand using the methodology of successive exclusion of observations and we found a standard rate of appropriate classification, increasing to 67, 7%, therefore the error rate increases to 32, 3%.

In the situation of logistic regression model, parameters are projected by the technique of "maximum likelihood". The beliefs of the projected coefficients of the model, shown in Table5 will be the results of the Wald test. The hypothesis H1, saying that the capitalization is positively related to personal debt ratio, appears steady with the theory:Indeed, the results show a good (2, 594) and significant (0. 026 **) relationshipat an even of5%between the capitalization of R&D costs and the debtratio. In connection with variability of results, the hypothesis H2 claims that theprobability of capitalizing R&D is likely to be reduced when the variability of results is positive. The results of your study confirm this hypothesis:Indeed, we noticed a negative (-0. 005) and significant(0. 069 *)relationshipat an even of10% between your capitalization of R&D and the change in return on property over the common of the prior 2 yrs. These results corroborate those of Garen et al. (2008) on a sample of Italian companies.

However, taking into account the political costs hypothesis H3. 1, we find an insignificant marriage between capitalization of R&D costs and personnel costs.

Under hypothesis H5, the capitalization of R&D costs is positively related to the grade of the external auditor, the results show a negative coefficient and insignificant marriage between both of these variables. This result can be justified by the small number of businesses that are not audited by one "BIG FOUR".

The hypothesis H6, proclaiming that the list over a U. S. market affects negatively the decision of capitalization of R&D costs, is not confirmed in this review:Indeed, the coefficient associated with the adjustable COTUS is not statistically significant, this final result can be justified by the fact that our test contains an extremely few French companies shown over a U. S. market.

Finally, in regards to the hypothesis H7, the coefficient associated with the variable MB is positive, which is constant with theoretical predictions, but this coefficient is not statistically significant.

After the persistence of the significant factors, an interpretation of chances ratios, offered in the column Exp (B), is interesting. The results show that indebted firm is 13. 380 times much more likely to maintain the group capitalizing their R&D costs. However, the chances proportion of the varying "VAR ROA" verify that a lot more the variability of results is positive the less is the opportunity to join the group of companies capitalizing their R&D costs (because the odd ratio is leaner than 1).

5 Conclusion

The convergence job, lately launched by the IASB and the FASB, has raised a debate about what constitutes an best accounting standard for R&D costs. Presently, both organizations have different positions upon this concern and empirical researches dont settle for one position or another and battle to find a common solution.

This work contributes to this debate by giving empirical proof on the utilization of capitalization of R&D charges for income management purposes.

Our results point out that the managers use accounting treatment of R&D costs in order to smooth profits also to avoid violating the covenants of debts agreements.

By noticing that the income smoothing and increasing leads to avoid violating the covenants of arrears agreements are believed as an opportunistic strategies, we can conclude that the existing position of the FASB, which will not allow overall flexibility and requires that R&D costs should be expensed, is more founded.

However, we must remember that the benefits of earnings management can even be a highly effective and reliable way to article and communicate important information on the market and we have to not neglect the prior literature which has often defended the capitalization of R&D costs focusing on the essential quality of relevance of accounting information.

Therefore, we assume that the best accounting treatment of R&D costs is not within the computerized execution of these latter as a cost, rather than in their capitalization with the risk of managerial discretion:Indeed, the first likelihood is a simple solution and the second one is very high-risk solution.

The best accounting treatment is the one which allows a compromise between relevance and consistency of accounting information.

Therefore, it is vital to look at an accounting model thatrequiresthe capitalization of R&D costs whenlimit, clearandaccurate conditionsare satisfied. In this case, the margin of managerial discretion will be reduced and it will improve within the same context, auditor's role to judge the compliance of the conditions.

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