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1. Introduction
The Australian Financial Reporting Council announced in July 2002 to adopt the International Financial Reporting Standards (IFRSs). Subsequently, the Australian Accounting Standards Board issued the Australian equivalent standards (AIFRS) of IFRS. As of 1 January 2005, all financial reports lodged with the Australia Securities and Investments Commission must be prepared in accordance with AIFRS. The transition from Australian Generally Accepted Accounting Principles (AGAAP) to AIFRS resulted in a significant change to the accounting requirements for research and development (R&D) spending. The AIFRS that prescribes the accounting treatment of R&D is AASB 138: Intangible Assets. Currently, all research costs have to be expensed as incurred, while development costs may be capitalised provided that a company can demonstrate a number of requirements in relation to the spending (AASB, 2009). Previously, under AASB 1011: Accounting for R&D Costs, all research and all development costs could have been capitalised provided that such spending could be recovered in future periods beyond reasonable doubt (AASB, 1987). The accounting requirements of AASB 1011 were arguably simpler and less restrictive, while the requirements of AASB 138 are argued to be too conservative (Ahmed and Falk, 2006; Deegan, 2007). Consequently, it is argued that AASB 1011 may have resulted in a greater amount of R&D spending being capitalised (Ahmed and Falk, 2006; Deegan, 2007) and that AASB 138 may have caused reductions in R&D spending.
The current study was motivated by two streams of prior research. First the USA underwent a similar change as Australia in the accounting treatment of R&D spending in 1975. Prior to 1975, all R&D spending could have been capitalised, but after 1975, all R&D spending had to be expensed (Horwitz and Kolodny, 1980). A few studies investigated whether the amount spent on R&D activities changed due to the change in the accounting treatment requirements in the USA (Horwitz and Kolodny, 1980; Elliott et al., 1984). Second, other studies have established a causal link between short-termism and reduced R&D spending (Graham et al., 2005), and a link between earnings management and reduced R&D spending (Osma and Young, 2009; Zhang and He, 2013). However, no studies were found that examined whether changes to R&D accounting requirements may have affected short-termism and earnings management in Australia. As...