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Country-level corruption and accounting choice : research & development capitalization under IFRS.

Mazzi, Francesco and Slack, Richard and Tsalavoutas, Ioannis and Tsoligkas, Fanis (2019) 'Country-level corruption and accounting choice : research & development capitalization under IFRS.', The British accounting review., 51 (5). p. 100821.


International Accounting Standard 38 Intangible Assets mandates that development costs must be capitalized if certain conditions specified in the standard are met. However, this requires managerial judgement and hence may be subject to opportunism. Corruption is a permeable informal country characteristic that penetrates firms' behaviour, influencing corporate misconduct. We conjecture that an environment with high corruption facilitates management in their justification of meeting the capitalization criteria of assets that should have been expensed, either partly or entirely. Effectively, these capitalized assets will not generate the future economic benefits implicitly conveyed by their recognition. This recognition, however, sends positive (albeit distorted) market signals for future earnings and increases current year reported earnings. We find that there is a positive relation between country-level corruption and the amount of development costs capitalized in a given year. Moreover, the higher the levels of country corruption, the lower the contribution of capitalized development costs in a given year to future profitability. Finally, this association is moderated by companies’ levels of internationalization.

Item Type:Article
Full text:Publisher-imposed embargo until 18 February 2021.
(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
File format - PDF
Publisher Web site:
Publisher statement:© 2019 This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Date accepted:10 February 2019
Date deposited:19 February 2019
Date of first online publication:18 February 2019
Date first made open access:18 February 2021

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