exploit the project; and e the costs are recoverable through the revenues generated by exploiting the project.

It is evident that the conditions stated by the Italian accounting standards are similar to those stated by IAS for development costs. In fact, the definition of applied research under Italian standards also fits into the definition of development costs provided by IAS 38. The Italian standards differ from IAS in that they do not require R&D capitalization when the abovementioned conditions occur, leaving flexibility in the hands of the companies. However, this difference is more formal than substantive. Given the subjectivity in assessing the occurrence of some of the conditions, it seems that, even under IAS, companies that prefer immediate expensing can easily justify this approach―even when the aforementioned conditions are met.

Concerning the amortization of R&D costs, the Italian accounting standards require that the amortization be carried out over a period of no longer than five years beginning from the moment the outcome product or process is ready to be used. The Italian Civil Code art. 2426 states that the capitalization of R&D costs shall be authorized by the collegio sindacale statutory auditors and that it is not possible to pay dividends until there are enough retained earnings to cover the carrying amount of the capitalized R&D costs. This stipulation limits the incentive to capitalize R&D costs for the purpose of increasing the amount of

dividends paid. The Civil Code also requires that R&D activities be discussed in the relazione sulla gestione management discussion and analysis section ; however, there is no clear requirement as to what quantitative or qualitative disclosures should be relayed with regard to the capitalization of R&D costs. Finally, the Civil Code states that information regarding the amortization schedules of such R&D costs be provided in the explanatory notes of the financial statements.

3 Earnings management and specific accruals

Earnings management is defined as a “purposeful intervention in the external financial-reporting process, with the intent of obtaining some private gain” Schipper, 1989, p. 92 . In generally accepted terms, earnings management occurs “when managers use judgment in financial-reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers” Healy & Wahlen, 1999, p. 368 .

The large amount of research carried out thus far indicates that managers exercise discretion and manage earnings using a wide variety of methods, ranging from carrying out special transactions so-called real earnings management to the manipulation of accruals. Several of the main incentives for earnings management include debt covenants, bonus plans, and income smoothing. The debt-covenant hypothesis suggests that managers

have an incentive to manage earnings in order to avoid violating covenants in debt contracts, which are typically stated in terms of accounting numbers or ratios. The bonus-plan hypothesis suggests that managers manage earnings in order to imize compensation. Healy 1985 shows that managers tend to reduce earnings if they fall either above or below bonus-plan bounds. In contrast, they tend to increase earnings when they fall between the two bounds. Finally, the income-smoothing hypothesis suggests that firms aspire to reduce earnings fluctuations.

Empirical earnings-management studies find support for the abovementioned motives in a variety of contexts. Many of these studies test the relationship between aggregate accruals and incentives for earnings management e.g., Healy, 1985; DeAngelo, 1986;?Dechowet al., 1995 . As an alternative approach, other studies focus on single items, suggesting that income from specific accruals is related in a systematic way to earnings-management incentives. Among these latter studies, McNichols and Wilson 1988 show that companies manage their bad-debt provisions according to the bonus-plan hypothesis Healy, 1985 . Zucca and Campbell 1992 examine discretionary asset write-downs, showing that companies use these accruals either for “big bath” strategies or for earnings smoothing. Francis, Hanna, and Vincent 1996 confirm that earnings-management incentives play a significant role in explaining goodwill write-offs and restructuring charges. Other studies focus on

allowances for deferred taxes e.g., Miller and Skinner, 1998; Schrand and Wong, 2003 . These studies provide mixed results. Finally, Dowdell and Press 2004 analyze the in-process R&D write-offs, but they do not find evidence to support their bonus-plan hypothesis.

In line with the aforementioned studies on earnings management and specific accruals, this study aims at testing whether the decision to capitalize or to expense R&D costs when flexibility exists is affected by earnings-management motives.

4 Hypotheses development

Previous research investigates three main incentives for earnings management: earnings smoothing, debt covenant, and bonus-plan incentives. In this study, we focus on the first two since disclosure of data on the existence and structure of bonus plans by Italian companies is limited.

The income-smoothing hypothesis suggests that a manager's accounting discretion is driven by his or her desire to reduce income-stream variability Fudenberg and Tirole, 1995 . The process of smoothing serves to moderate year-to-year fluctuations in income by shifting earnings from peak years to less successful periods. This process lowers the peaks and makes earnings fluctuations less volatile Copeland, 1968 .

Income smoothing has been viewed both as a positive strategy, whereby managers transmit private information to investors e.g., Gordon, 1964, April; Beidleman, 1973; Ronen and Sadan, 1981; Tucker and Zarowin, 2006 ,

and as a manipulative practice driven by opportunistic aims Gordon, 1964, April; Imhoff, 1977, Spring?;Kamin and Ronen, 1978 . In this study, we do not intend to argue for either one of these two views. Rather, we test whether R&D cost capitalization is used for purposes of earnings smoothing.

毕业设计