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

University essay from Göteborgs universitet/Företagsekonomiska institutionen

Abstract: Background: The world is moving towards a knowledge-based, rather thanmanufacturing-based, industry. During the last decade both EU and U.S. haveincreased their R&D spending, especially for software development. Thismakes the accounting choices for these costs of great importance. Since thetwo markets use different accounting regulations, IFRS and US GAAP, it is ofgreat interest to study if and why there are differences between the twostandards’ treatment of software development costs. Although the similaritiesbetween the two standards are predominant, still we hypothesize that thereare differences in how firms in the two regions account for their developmentcosts for software.Research design: The hypotheses are investigated by comparing a sampleof companies in the software industry for both EU and U.S. Hypotheses havebeen created and data has been gathered from the database Datastream. Toanalyze the data and see if the null hypothesis can be rejected, multiplestatistical tests have been executed. Both non-parametric test as well asparametric tests has been utilized in this thesis.Conclusion: The thesis provides evidence that there is a difference in thepropensity of capitalization of development costs in the software industrybetween EU and U.S. Moreover, it provides evidence that neither of theincentives age, turnover or total assets affect the amount capitalized.Furthermore, neither of the two target-beating variables affectedcapitalization of development costs. This can be due to the small sampletested. Only the variable US GAAP is an affecting factor on capitalization. Thissuggests that other factors, such as enforcement and differences between themarkets, most certain influence the accounting choice for softwaredevelopment costs.

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