The Dark Side of R&D: Evidence of Classification Shifting to Avoid Goodwill Impairments
Chuan-San Wang/Department and Graduate Institute of Accounting & Center for Financial Economic and Regulation Intelligence, National Taiwan University
Abstract
Current accounting standards allow purchased goodwill to be offset by expenses related to internally generated intangible assets. We find that firms with purchased goodwill strategically misclassify core expenses—specifically cost of goods sold (COGS) and selling, general, and administrative expenses (SG&A)—as research and development (R&D) spending to avoid recognizing goodwill impairments. However, this misclassification does not preserve the economic asset quality of purchased goodwill nor reduce operating expenses effectively. Further analysis reveals a positive association between purchased goodwill and the disclosure of R&D spending. Firms disclosing R&D expenditures exhibit more delayed recognition of goodwill impairments. Additionally, R&D spending that is likely misclassified shows lower variability in future performance and commands a lower market valuation compared to ordinary R&D spending. Overall, our findings suggest that shifting core expenses to R&D can delay goodwill impairment recognition in accounting terms but fails to reflect the underlying economic reality.
Keywords
Expense classificationResearch and development (R&D)GoodwillImpairment testing
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