The purpose of this thesis is to explore the economic consequences of IAS 38 and how they influence management’s decision-making behaviour regarding R&D investments. IAS 38 allows management to choose whether to capitalise or expense a development cost about investment in R&D. Hence, by following these options, managers can adopt real earnings management practices that may modify the actual financial disclosure when results are off track. The study aims to identify a positive relationship between the non-anticipated economic consequences (translatable into financial performance) and the management’s decision to adopt real earnings management when investing in R&D under IAS 38. Following the discussion, the research purpose is broken down into the following objectives: 1) identify the positive effect of the non-anticipated economic consequences (translatable into financial performance) on management’s decision-making behaviour with regard especially to real earnings management when investing in R&D under IAS 38, 2) explore in detail the process whereby the non-anticipated economic consequences positively influence management’s decision-making behaviour (translatable into financial performance) when investing in R&D under IAS 38, 3) explore the factors that influence how the non-anticipated economic consequences positively impact on management’s decision-making behaviour (translatable into financial performance) when investing in R&D under IAS 38.
A mixed methods approach was adopted, involving a survey and semi-structured interview, followed by convergent triangulation of the methods' findings. The survey draws subjective results and data to investigate any positive interrelationship between the financial performance’s effect on adopting real earnings management policy when management makes crucial decisions, like investing in R&D under IAS 38. At the same time, the interview allows the researcher to explore in-depth and understand management’s decision-making behaviour, such as the adoption of real earnings management in investing in R&D under IAS 38 and how financial performance influences it. The interview’s findings provide support and complementary data to the survey’s, ensuring the study’s credibility and trustworthiness while enhancing the understanding of the studied phenomenon (triangulation of results). The population sample in both studies included CFOs from publicly listed UK companies that have adopted IAS/IFRS and met the professional experience and accounting knowledge criteria. The collected evidence covered a variety of sources, including a) 165 surveys and b) 10 interviews.
As far as research objective (1) is concerned, the findings indicate a positive relationship between the non-anticipated economic consequences (translatable into financial performance) and management’s decision-making behaviour through real earnings management when investing in R&D under IAS 38. Management decides to follow manipulative policies when financial performance is not on target, especially regarding investment in R&D under IAS 38. An out-of-target financial performance affects management to adopt more real earnings management policies to manipulate the actual result.
Concerning research objective (2), the findings suggest that management adopts a continuous performance monitoring policy, constituting a process whereby non-anticipated economic consequences influence an organisation’s decision-making behaviour. The researcher identifies the management’s choice for continuous monitoring policy of the financial data as a way to avoid unexpected negative results or even to minimise the failure of a strategy. Also, such a policy reflects the perceived importance of the financial statements and supports or effectively encourages real earnings management activities. The findings show that the more important the financial data for the managers, the more they insist on a continuous monitoring policy to control risks and unexpected results. This specific decision is more likely to be made when the financial performance is vital to them and supports more real earnings management activities.
Regarding research objective (3), the research findings indicate that the CFO’s accounting knowledge, role and professional experience; the managers’ cognisance or knowledge of their company; and “grant funding” are important factors in impacting or shaping the management’s decision-making behaviour, enhancing the relationship between R&D expenditure decisions and reported performance. All the factors mentioned above reflect the personal and professional characteristics that influence the decision-making behaviour of managers. However, one exogenous factor appears to be highly influential when investing in R&D under IAS 38, namely grant funding. All respondents admit the use of questionable methods to meet the basic requirements of the funding, which might result in changes in the actual financial picture.
This thesis contributes to real earnings management and international accounting literature by offering insights into the influence of the economic consequences on the management’s decision-making process and the dysfunctionality of the IAS/IFRS when providing the option of choice through a specific accounting standard. Such cases develop information asymmetry with all interested parties promoting real earnings management policies, which work against the fundamental objective of the IAS/IFRS to inform public interest about an organisation’s financial disclosure and meet the common needs of all the organisation’s stakeholders.
