Capitalization of software development costs -a comparison between EU and U.S.

Abstract: Background: The world is moving towards a knowledge-based, rather than manufacturing-based, industry. During the last decade both EU and U.S. have increased their R&D spending, especially for software development. This makes the accounting choices for these costs of great importance. Since the two markets use different accounting regulations, IFRS and US GAAP, it is of great interest to study if and why there are differences between the two standards’ treatment of software development costs. Although the similarities between the two standards are predominant, still we hypothesize that there are differences in how firms in the two regions account for their development costs for software. Research design: The hypotheses are investigated by comparing a sample of companies in the software industry for both EU and U.S. Hypotheses have been created and data has been gathered from the database Datastream. To analyze the data and see if the null hypothesis can be rejected, multiple statistical tests have been executed. Both non-parametric test as well as parametric tests has been utilized in this thesis. Conclusion: The thesis provides evidence that there is a difference in the propensity of capitalization of development costs in the software industry between EU and U.S. Moreover, it provides evidence that neither of the incentives age, turnover or total assets affect the amount capitalized. Furthermore, neither of the two target-beating variables affected capitalization of development costs. This can be due to the small sample tested. Only the variable US GAAP is an affecting factor on capitalization. This suggests that other factors, such as enforcement and differences between the markets, most certain influence the accounting choice for software development costs.