In-process R&D: To capitalize or expense? [An article from: Journal of Engineering and Technology Management]

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Description:
The FASB recently proposed the capitalization of acquired in-process R&D costs to replace the current practice of expensing this item. This proposal will likely be strongly opposed by corporate executives. We examine whether in-process R&D is an asset worthy of capitalization or an expense, and, if it is an asset, how reliable is its estimate. We find a significant association between the values of in-process R&D and acquiring firms' cash flows during the 3 years subsequent to acquisition, thereby supporting the FASB's proposal to recognize in-process R&D as an asset. Preliminary tests are positive for the reliability/objectivity of in-process R&D estimates.