R&D Capitalization and The Income Smoothing Hypothesis – A study of Swedish listed Companies

Abstract: This paper examines whether Swedish listed firms use research and development (R&D) accounting as a tool for income smoothing (hypothesis 1). One controversial accounting issue concerning R&D is that R&D capitalization could be influenced by earnings management purposes due to a subjective accounting treatment. We also examine whether firms´ degree of fluctuation in return on assets (ROA) has an effect on income smoothing behavior (hypothesis 2). Finally, we investigate if the level of flexibility allowed in the R&D accounting with the different accounting standards, BFN R1, RR 15 and IAS 38 has an effect on income smoothing behavior (hypothesis 3). We study the accounts for 21 firms for the years 1998-2000, 52 firms for 2002-2004 and 59 firms for 2007-2009. Using multiple regression analysis we find that the income smoothing hypothesis is supported in period two (2002-2004). The regression analysis also indicates that firms with low change in ROA tend to capitalize more R&D when they are less profitable than prior year. Our results also imply that the level of flexibility in different accounting standards does not have an effect on income smoothing behavior and hypothesis 3 is not supported.