The Investigation of factors affecting accounting treatment

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INTRODUCTION

The global market is facing an extensive technological development since the mid-1990s; which make research and development an important investment in a company (Lee, 2007). Hence, finance accounting literature has taken an interest in the relationship between Research and Development (R&D) expenditures and the firm's value (Lantz, 2005). R&D investments will benefit a firm with positive operating performance on profitability and higher stock return (Hokkanen, 2006). Besides that, the uncertainty of future economic benefits is correlated to R&D expenditures and it was found that R&D expenditures increase future earnings variability significantly more than capital expenditures (Kothari, 2002).

In Malaysia, the initial stage of industrial development for Malaysia was started during 1960's to 1970's, where government policy on technology was oriented more towards encouraging foreign direct investment (FDI) in the industries which considered as "high-technology". However, began from mid-1980s, Malaysia government put in more efforts to enhance the country's science and technology capacity, which include the public policies to improve the financing of innovation-related activities such as R&D, either directly through grants or indirectly through tax incentives (Lee, 2007). According to Promotion of Investment Act 1986, tax incentive are given to contract R&D company, R&D company, in-house research and research institute for the purpose of encouraging more people to involve more people actively in R&D activities. For example, double deduction or tax exemption for certain percentage of R&D expenditure (Sarawak government, 2010).

In addition, the Ministry of Science, Technology and the Environment also set up the Multimedia Super Corridor (MSC) Research and Development Grant Scheme (MGS) to encourage investment in R&D activities for companies based within the MSC area. Malaysia government has initially allocated RM 100 million to the MGS under the Seventh Malaysia Plan. Seeing that the result was encouraging, the allocation of fund for the MGS has been increased to RM 200 million under the Eighth Malaysia Plan (Pak, 2003).

The definition of R&D is known as creative work undertaken by a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications. However, the accounting treatment for R&D in Malaysia was only being discussed generally in Financial Reporting Standard (FRS 138) under Malaysian Accounting Standard Board (MASB), Intangible Assets, which stated if the development costs fulfilled the criteria stated in FRS 138, it should be recognized as an asset and the amount of development cost should be amortized accordingly (Kamarun, 2006).

The capitalization or expensing R&D costs has always been a controversial accounting issue. For supporters of capitalization results show that R&D is a long-lived asset that influences future profitability (Pozza et al, n.d.). And capitalization of development costs provides relevant information to investors and reduces the information asymmetry (Jesus Garcia-Garcia, 2010). For the supporters of expensing are fewer. They stress the lack of reliable evidence of future economic benefits or refer to the benefits of consistency and comparability, pointing out that such benefits trump the costs identified by the supporters of capitalization (Pozza et al, n.d.). Additionally, financial analysts prefer more conservative accounting methods (Michael T. Kirschenheiter & Ram Ramakrishnan, 2010). However, expensing is preferable to capitalization because it increases the objectivity of financial statements. That is it eliminates the opportunity for managers to capitalize costs of projects that have low probabilities of success or to delay impairment of R&D assets. (Zhen Deng & Baruch Lev, n.d.). Based on the current accounting standards in Malaysia is only eligible development costs can be capitalized and amortized whereas all costs related to research activities are expensed immediately (Kamarun, 2006).

In light of this discussion, it appears that the decision to capitalize or expense R&D cost must consider carefully by company and it may influence both investor.

1.2 Research Problem

There are several different accounting treatments imposed by a company in different country for R&D cost incurred as to suit the requirements and culture of the country.

In Canada, the accounting treatment of R&D spending is affected by several key characteristic of a firm, which included the firm's cross-listing status and industry classification. Canadian cross-listed firms are more likely to capitalize their R&D expenditures. They found that capitalization increases with leverage, firm age and cash flows. It decreases with firm size, and profitability (Atallah, 2005).

In Italian, whether the companies' decisions to capitalize or to expense R&D costs are affected by earnings management. Several of the earnings management include debt covenants, income smoothing and bonus plans (Pozza et al, n.d.).

Whereas, in United Kingdom (UK), the decision to expense or to capitalize development expenditures affected by firm-specific factors such as profitability, leverage, R&D intensity, R&D steady-state, systematic risk and firm size (Oswald, 2000).

Based on these accounting standards, the development costs should be capitalized if meets the criteria listed above for companies in each different country. However, from the researches that there are several other factors affecting the firm's decision whether to capitalize or expense-off the R&D cost. Most of the factors are relating to the firms' characteristics. In Malaysia, there are only limited resources available for the purpose of studying which factors are affecting the treatment of R&D for the firms in Malaysia.

1.3 Research Questions

In this study, researcher seeks to look at the factors that would affect the treatment of R&D in a firm and which of the factor that is affecting the accounting treatment. Thus, the following research questions would be addressed in this study.

1) What are the factors affecting firms to capitalize or/and expense-off R&D costs in Malaysia?

2) What are the main factors affecting firm to capitalize R&D costs in Malaysia?

1.4 Research Objectives

The objectives of this study are to investigate the factors that affecting firms' decision to capitalize or expense-off the R&D costs. In other words, it is to identify the factors that would influence the decisions of a company in determining the accounting treatment for R&D of the firms in Malaysia. Based on the literature review, there are a number of factors affecting the firm's decision whether to capitalize or expense-off the R&D costs. However, in this study taped it down to five main factors that would affect the decision-making process. The following are the specific objective to achieve under this research:

To investigate whether the firm size will affect the company decision on accounting treatment of research and development

To investigate whether the profitability will affect the company decision on accounting treatment of research and development

To investigate whether the return on equity will affect the company decision on accounting treatment of research and development

To investigate whether the leverage will affect the company decision on accounting treatment of research and development

To investigate whether the cash flow from operation will affect the company decision on accounting treatment of research and development

1.5 Significance of the study

This study helps the public to have a better understanding on the issue of R&D spending. It also serves as forecast of future benefit for the investors of those investment trading companies during their decision-making process. For example, if the profitability of a firm is one of a factor which affect the firm's decision to capitalize their R&D costs. Based on this information, the investors also can predict the future benefit of a firm which is having R&D project easier and make the most appropriate decision. Beside that, this study also assists the financial analysts in analyzing the performance of a firm in the future.

For future research, this study may provide useful information for researches on R&D with the subsequent return of a company. Different treatment of R&D costs might affect the subsequent return of a company in a significant manner. As a conclusion, this study is important as there were increasing demand for those companies which are having R&D project to decide on the most suitable method to treat the cost on R&D project.

LITERATURE REVIEW

2.1 Research theory: Positive Accounting Theory

Positive accounting theory which seeks to explain and predict actual accounting practices (Kabir, 2007). The theory is contrast with the normative accounting focus in accounting research shifted from the development of accounting principles and seeks to derive and prescribe "optimal" accounting standards (Coetsee, 2010). When a firm carry out the productive activities was depending on arrangement is cost effective. According to Watts & Zimmerman (1990), positive accounting theory has most commonly been using to explain management's accounting choices, largely in terms of contracting cost. Contracting costs arise in market transactions, transactions internal to the firm, and transactions in the political process. The concept of contracting costs and the notion of an efficient set of accounting methods as part of organizational technology play key roles in positive accounting theory. Besides that, the latter contend that accounting's primary role is to value the firm and practices like conservatism. Therefore, management plays a central role in the determination of standards setting (Watts & Zimmerman, 1978).

Firm characteristic such as firm size, return on equity, leverage, profitability and others are the factors to determine the discretionary of the management in choosing the best accounting treatment for R&D costs (Maines et al, 2002). The accounting treatment for the R&D costs is essentially important in value relevance of a firm. The capitalization or expense-off the cost will causes the value of the firm increase or drop down. Thus, treated the cost correctly is important in arriving the value relevance of firm (Givoly & Shi, 2007).

Financial statements are prepared to report a company's financial situation and income operations about the assets, liabilities, equity, income and expenses of the company. Firm value is determined through the financial statement. However, difference accounting policy will affect the difference figure shown in the book. Therefore, the treatment of R&D cost will lead to difference figure show in financial statement. Thus, the R&D cost is serving as an earning management tool for some firms (Mentz, 2007).

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2.2 Research and Development Costs

The Malaysian Accounting Standards Board (MASB) is the independent authority established under the Financial Reporting Act 1997 to develop and issue accounting and financial reporting standards in Malaysia (MASB, 2008). However, under Financial Reporting Act 1997 section 26(A), MASB also accept the following international accounting standards such as International Accounting Standards Board; Financial Accounting Standards Board, United States of America; Accounting Standards Board, United Kingdom; and Australia Accounting Standards Board, Australia (Deloitte, 2010).

Financial Reporting Standard (FRS) is the accounting standard which approved by MASB. FRS 138 has clearly defined the R&D and identified accounting treatment for R&D costs. Under FRS 138, Intangible asset is an identifiable non-monetary asset without physical substance (Haigh, 2009). Moreover, FRS 138, Intangible asset is recognized if it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity, and the cost of the asset can be measured reliably (MASB, 2010).

Research is original and planned investigation undertaken with the prospect of gaining scientific or technical knowledge and understanding. For examples of research activities are activities aimed at obtaining new knowledge; the search for applications of research findings or other knowledge; and the search for alternatives for materials, products, processes, systems and services (Barry & Jamie, 2008). Besides that, development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, system or services prior to the commencement of commercial production or use. For examples, the evaluation of product or process alternatives for commercial production; the design, construction and testing of pre-production model; and the design of tools involving new technology are the activities included in development activities (MASB, 2010 a).

Generally, the nature of activities included by research and development is understood. However, it may be difficult to identify those activities in particular instances. Furthermore, the identification of research and development activities often depends on the types of business, how the business is organized and the type of projects is undertaken (MASB, 2010 b).

Abrahams (1998) indicate that R&D activity can be viewed as an investment of time and money that creates real future economic benefits. However, it also represents highly risky business strategies with uncertain future benefits. An impressive body of literature that firm's productivity and profitability as the primary performance indicators to reflect the outcome of its R&D investment. In addition, in the Schumpeter tradition implies that a firm's incentive to carry out R&D activities is to obtain higher profits and productive (Johansson et al, 2008). Ang (2009) stated that positive relationship between R&D activities and economic growth, growth in productivity as evidence by an increase in a better knowledge of patent.

2.3 Accounting treatment for Research & Development costs

In Malaysia, R&D costs should comprise all cost that are directly attributable to research and development activities and costs that can be allocated on a reasonable basis to such activities.

Under FRS 138, research costs recognized as an expense in the period in which they are incurred and should not be recognized as an asset in a subsequent period. Development costs should be recognized as an asset when all the criteria in FRS 138 are met (MASB, 2010). The criteria includes: (1) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (2) the intention to complete the intangible asset and use or sell it; (3) its ability to use or sell the intangible asset; (4) how the intangible asset will generate probable future economic benefits; (5) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and (6) its ability to measure reliably the expenditure attributable to the intangible asset during its development (Elliott, 2008).

All research expenditure is charged to the income statement. For development expenditure, this is capitalized as an internally generated intangible asset, only if it meets criteria, relating in particular to technical feasibility and generation of future economic benefits.

Based on the accounting standards, in Malaysia as well as International Accounting Standards Board, Accounting Standards Board, United Kingdom and Australian Accounting Standards Board only eligible development costs can be capitalized and amortized whereas all costs related to research activities are expensed immediately (Kamarun, 2006). On the other hand, Financial Accounting Standards Board, United States of America required firms to expense all research and development cost, except the software development costs of product for which technological feasibility.(要找references)

2.4 Firm size

In this study, the companies' annual sales or revenue are used to measure the firm size and it is categorized the size of the company into Small and Medium Enterprise (SME) and Large Enterprises (Radam et al, 2008). This is a common way used by Malaysia to identify the size of company. For the company where the annual sales not exceeding RM5 million is considering as SME, otherwise it is considering as Large Enterprise (Lim, n.d.). SME and Large Enterprises are likely to play roles in R&D. Galbraith (1952) stated that innovation of R&D had become so costly and it could be done by firms that had the resources associated with considerable size.

According to Rath (2008), the large firms are more politically sensitive and have relatively larger wealth transfer imposed on political costs than smaller firms. Therefore, larger firm are more likely to use accounting procedures that reduce current earnings such as expensing development costs (Oswald, 2000). Daley and Vigeland (1983) do find that political pressure, as measured by size, influences the accounting choices.

However, a different prediction on structure firm size may be possible. Large enterprises are riskier than SME because executive compensation contracts are based on stock options, which are positively related to the risk of the underlying assets. As a result, managers of larger enterprises are more willing to undertake riskier projects (Bolton et al, 2005). Managers of riskier firms choose accounting methods that exhibit financial reporting discretion association between in the choice of capitalization of R&D expenditure. It may be explained by a risk factor. Therefore, in this case, larger firms are more likely to capitalize R&D spending (Percy, 2000).

As conclusion to the empirical studies, the large enterprises are more likely to capitalize their R&D cost based on different culture and circumstances.

2.5 Profitability

Profitability is measured by net income converted to full expensing (ie, income plus software amortization minus the annually capitalized software) divided by sales (Aboody, 1998).

Given analysts' skepticism about research and development capitalization, it is widely believed that profitable companies avoid capitalization in order not to taint the perceived quality of their earnings in analysts' eyes (Jeanjean, 2003).

Besides that, if U.S. firms had capitalized R&D expenditures to reflect their future benefits, the power of capitalized R&D to explain the firm's market value would have exceeded that of expensed R&D expenditures. Using the capitalization method, the accumulated R&D expenditures constitute an asset on a firm's balance sheet expected to provide future benefits (Church et al, 2008). However, the practice of immediate expensing R&D expenditure leads to biases in the firm's profitability measures such as return on equity and mispricing of its stocks (Ahmed & Falk, 2006).

2.6 Return On Equity (ROE)

With "excess returns" focus on measuring and forecasting returns earned by business on both investments made in the past and expected future investments. Based on Damodaran (2007) the higher ROE firms are more likely to capitalize R&D costs than the lower ROE firm. Therefore, in this study, the positive or negative ROE is calculated based on profit after tax divide by the total equity to measure high or low ROE respectively.

According to Atallah (2005) stated that the highly unprofitable firms (low ROE), they are more likely to expense R&D spending. However, highly profitable firm are concerned with decreasing their income to reduce political costs or scrutiny which leads them to expense their R&D spending.

In U.S., managers are more likely to consider current period income effects when making R&D decisions than when making capital spending decisions whose costs are amortized over a number of years. They conclude that the regulation of accounting practices has direct and non-trivial economic consequences. Thus, it seem that compliance with SFAS 2, the immediate expensing rule, result in manipulation of the amount of R&D spending in order to achieve specific net income goals (Baber et al, 1991).

The situation may be quite different in Canada since capitalization is possible. Canadian firms may prefer to capitalize R&D spending instead of adjusting its level of R&D investments to achieve their net income goal. Mande (2000) explain that firms that capitalize their R&D, the income effect are expected to be smaller because changes in R&D are spread over several periods. Thus, firms with incentives to increase their financial performance are more likely to capitalize some R&D spending.

2.7 Leverage

In this study, leverage is measure as the ratio of debt to total assets (total debt divided by total assets)in order to determine the high or low leverage by which its ratio is more than 1 or less than 1 accordingly (Markarian et al, 2008).

In a study performed prior to the implementation of the immediate expensing rule in the U.S., Daley and Vigeland (1983) they find that the higher the leverage, the more likely firms are to capitalize R&D spending. The rationale is that captures management incentive to meet debt covenants. The closer a firm is to a particular restrictive accounting-bases covenant, the more likely management is to use procedures that increase total assets such as the capitalization of R&D spending or to adopt income increasing accounting method. According to Landry and Callimaci (2003), they believe firms with higher leverage will choose to capitalize R&D spending in order to have lower leverage.

The relationship between leverage and management's incentive to increase earnings has been tested in various ways and is well-documented in the accounting choice literature (Watts & Zimmerman, 1986). Therefore, it predicts that highly leveraged firms will choose to capitalize R&D costs in order to meet debt covenants.

2.8 Cash flow from operations

Cash flow from operations (CFO) represents the cash flow available from core operations after all payments identified by the company as for ongoing operational requirements (The Financial Express, 2006). Meanwhile, the amount of cash flow from operations shows in cash flows statement is measure the availability of internally generated funds. This amount is deflated by total asset. Therefore, calculate the ratio for cash flow from operation divide by the total assets will get the positive or negative amount (Jordan, 2007). In this study, the results of positive amount reflect the company is availability of internally generated funds.

The level of internally generated funds may have a significant influence on the timing and the magnitude of R&D spending (Kamien & Schwartz, 1978). The level of internally generated funds can therefore measure a firm's financial ability to pursue its R&D activities to successful completion in a timely manner. For this reason, Landry and Callimaci (2003) argue that the level of internally generated funds captures to what extent firms may meet the 5 criterion of Canadian Institute of Chartered Accountants Handbook, section 3450 which requires that adequate resources exist, or are expected to be available, to complete the project. Hence, the firms with high levels of internally generated funds are more likely to meet the fifth criterion and thus be able to capitalize R&D spending (Anne, n.d.).

However, if a firm accounts for R&D spending using an immediate expensing rule as in the U.S., fluctuations in the level of internally generated funds result in variability in earnings. In other words, financially constrained R&D intensive firms experience higher earnings volatility when capitalization is proscribed because capitalization of R&D spending can shield earnings against volatility in R&D spending. Financially constrained firms may therefore be more likely to capitalize R&D spending to reduce earnings volatility.

Company's reported income and actual cash on hand

For example, cash flow is a metric used both internally and by many financial analysts. Cash flow calculations are taken from the accounting books where R&D is expensed. Here, expensing R&D has the effect of creating positive cash flow since taxes are paid on a lower net income. Thus, it is important to view the effects of R&D outlays within the proper context of valuation (2).

Leverage is measured by long-term debt divided by total capital. Leverage is a proxy for restrictiveness of loan covenants as motivators of capitalization. Firm closer to loan restrictions may favour capitalization which increases equity and earnings (Jeanjean, 2003).

http://web.merage.uci.edu/~cshi/external%20documents/accountingforsdcandipos.pdf (p11)

aboody and lev 1998 who show that capitalized sdc is valued more by investors and indeed associated with greater future profitability than expensed sdc.

RESEARCH METHODOLOGY

3.1 Introduction

In this chapter, it will explain the methodology that was being used to conduct the research. It encompasses the theoretical framework, data collection, sample size and data analysis method.

3.2 Research Design

As discussed earlier, characteristic of a firm is classified as the main factor for a listed company to decide whether to capitalize or expense-off of the R&D costs. The units of analysis are technology-based listed companies. Besides that, the period of study is two years (available from 2008 to 2009) and data available is for two years. Although the period of data that are tested in this research is two years, collection of data is based on cross-sectional basis as data from the past were taken from annual report and was being compared in the same point of time.

3.3 Variables and Measurement

Measurement of theoretical framework is very important for research design. In the condition of absence of appropriate measurement, hypotheses would unable to be conducted and answered the research question.

3.3.1 Theoretical Framework

Firm size

Independent Dependent

Variables Variable

Accounting treatment of

R&D

- Capitalization

- Expense-off

- Capitalize and

Expense-off

Profitability

Return On Equity

(ROE)

Leverage

Cash flow from operation

3.3.2 Dependent Variable

Accounting treatment for R&D is the dependent variable in this research. Although the company has capitalized R&D costs at a particular financial year but the company may also has expenses-off some other R&D cost in the same period. Therefore, I used the nominal scale to measure the implementation of accounting treatment of R&D cost by a company: capitalized or/and expenses-off R&D costs.

3.3.3 Independent Variables

In this research, five independent variables have been identified in the theoretical framework, which are firm size, profitability, return on equity, leverage and cash flow from operation of the company. In this research, all the independent variables are measured by nominal scale.

3.4 Data Collection Method

There are numerous ways and sources that could be used to collect data. Data sources can be divided into primary data and secondary data. Primary data is data that a researcher consists of information collected on his or her own for a specific purpose. Besides that, secondary data consists of information that already existing sources by other researchers for another purpose (Saunders et al, 2007).

3.4.1 Secondary Data Collection

In this study, the data collection method used was secondary data collection. Secondary data collection is a collection method by obtaining existing information source which is published or unpublished. Secondary data is used because it is readily available, cost saving and can be gathered in a quicker manner.

Information was acquired from a number of sources. References books are one of the main sources that provide a basic understanding the concept of accounting treatment for R&D, and definition of the accounting terms. There are substantial amounts of books from financial accounting and reporting on this particular topic and valuable literature can be gathered by referring to these books. Most of the information was sources from Butterworth's Public Library, and Library of College PTPL.

Furthermore, internet web sites are also one of the importance methods that use to obtain the relevant information or sources in this study. In addition, data collected are obtainable through the Internet which is financial statements of all technology-based listed companies that chosen as samples in research. All the listed companies' annual reports 2008 to 2009 can be downloaded from the Bursa Malaysia website.

3.5 Hypothesis Development

There are five tests of hypothesis in this study:

H1: Firm size significantly affects the accounting treatment of R&D.

H2: Profitability significantly affects the accounting treatment of R&D.

H3: Return on equity significantly affects the accounting treatment of R&D.

H4: Leverage significantly affects the accounting treatment of R&D.

H5: Cash flow from operation significantly affects the accounting treatment of R&D.

3.6 Population and Sampling

Target population of this study is the complete group of relevant elements. The reason of choosing the companies involved in technology sector which listed in Bursa Malaysia is because R&D is an investment which would by and largely incurred by the companies in high-technology industries. Furthermore, all of the companies' data collected are listed in Main Market (merging of Main Board and Second Board) and Ace Market (revamp of MESDAQ Market), where those of the companies are technology-based firm. Thus, the result for this research will be more appropriate on showing the relationship for the reason that those firms are highly reliance on R&D intensity in this industry.

The population of this study is 106 technology-based companies listed in Main Market and Ace Market. The technology-based company chosen is based on the List of Shariah-Compliant Securities publish by the Shariah Advisory Council of the Securities Commission. The Shariah Advisory Council (SAC) of the Securities Commission (SC) has an approved updated list of securities, which have been classified as Shariah-compliant securities.

There are 29 companies from Main Market and 77 companies from Ace Market (Appendix 1). There were 49 out of 106 companies chosen as samples for the research. A simple random sample is chosen to be conducted rather than other sampling method in this study because it provides more evenly dispersed throughout the population for samples of more than a few hundred companies. Random numbers allow me to select sample without bias and the sample selected can be representative of the whole population (Saunders, 2007). However, every company in the list has equal chance of being selected in sample.

3.7 Data Analysis Method

Data analysis is being done by scrutinizing the information or data that had been gathered in order to draw conclusions. During the process of researching, all necessary information is gathered, and then the data elements were grouped and recorded.

Statistical Package for the Social Science (SPSS) is one of the most generally used, powerful and statistical software packages. It covered a broad range of statistical procedures that allowed users to summarize data, determine whether there are significant differences between group, examined relationships among variables and graph results. In this study, SPSS has been adopted to process information needed from the data and run hypothesis test.

3.7.1 Descriptive Analysis

Descriptive analysis is performed to describe the characteristic of sample and to obtain an understanding of the data. One of the simple methods that can be used for describing sets of relationships is cross-tabulation. A cross-tabulation is a frequency distribution of responses on two or more sets of variable (Davis, 2000). The total samples of technology-based company for year 2008 and 2009 were compared and each of the independent variables for both years are being evaluated and analyzed to check whether there are any changes. Furthermore, the changes of each independent variable to dependent variable for both years have to be analyzed and compared.

3.7.2 Bivariate Statistical Test

Bivariate statistical test refer to a statistical procedures used to describe the relationship between two variables. In statistical terminology, null hypothesis means that there has not significant influence between the two groups. Normally, the Chi Square statistic can be used to test whether the frequencies of two nominally scaled variables are related. In this study, whether or not the observed frequencies (the actual counts of data from our census) 'fit' the expected frequencies (the theoretical frequencies derived from my null hypothesis of on relationship between the two variables) is being tested. In other words, it is testing the 'goodness of fit' for the observed frequencies distribution with the expected distribution. The significance value in the Chi Square test is labeled as "Asymp.Sig". The assumption for the acceptable level of statistical significance is 0.05, which should be less than 0.05.

FINDINGS AND DISCUSSIONS

The following data is the results which are obtained from SPSS and Microsoft Excel. Those data have been summarized and reform into table and text are provided to give a better understanding of the analyzed results.

4.1 Descriptive Analysis

Table 4.1.1 Statistic 2008

Size of company

Profitability

Return

On

Equity

Leverage

Cash flow from operation

Accounting treatment

N Valid

Missing

47

3

47

3

47

3

47

3

47

3

47

3

Table 4.1.2 Statistic 2009

Size of company

Profitability

Return

On

Equity

Leverage

Cash flow from operation

Accounting treatment

N Valid

Missing

47

3

47

3

47

3

47

3

47

3

47

3

There are total numbers of 106 technology companies listed in Bursa Malaysia. However, there are only 47 companies' data are complete and available for the study. The missing data proportion is control less than 5%. From Table 4.1.1, the valid company for 2008 is 47 companies for the size of company, profitability, return on equity, leverage, cash flow from operation and accounting treatment. Table 4.1.2 shows the valid company for 2009 is 47 companies.

4.1.1 Accounting Treatment of R&D

Figure 4.1.1 Accounting Treatment of R&D 2008 and 2009

Figure 4.1.1 shows the frequency and percentage of accounting treatment for year 2008 and 2009. The result shows that 39 (83.0%) companies choose to capitalize R&D cost. There are 4 (8.5%) companies choose to expense-off R&D cost. The remaining of 4 (8.5%) companies chooses both capitalize and expense-off for their R&D cost. From 2008 to 2009, there are no changes for companies choose to capitalize R&D cost, expense-off R&D cost and capitalize and expense-off R&D cost.

4.1.2Firm Size

Figure 4.1.2 Size of company 2008

Figure 4.1.3 Size of company 2009

Figure 4.1.2 shows the frequency and percentage of the size of company for the year 2008 by using pie chart. For the size of company, if annual sales more than RM5 million, the company consider as large company, if less than RM5 million, the company is small company. There are 46 (98.0%) large companies out of the total of 47 companies. In other words, there is 1 small company, which consists of 2.0%. Figure 4.1.3 shows the frequency and percentage of the size for the year 2009. There are 45 (96.0%) large companies out of the total of same 47 companies. There are 2 small companies, which consists of 4.0%. This shows that there is decreasing of 1 (2.1%) large company for the size of company from year 2008 to year 2009.

Table 4.1.3 Size of Company *Accounting Treatment of R&D Cross-tabulation 2008

Accounting Treatment of R&D

Total

capitalization

expense off

capitalization & expense off

Size of Company

large(>RM5m)

38

4

4

46

small(<RM5m)

1

0

0

1

Total

39

4

4

47

Table 4.1.3 is the cross-tabulation for size of company and accounting treatment for R&D costs for year 2008. In 2008, among the total of 46 large companies, there are 38 (82.6%) companies choose to capitalize R&D cost, 4 (8.7%) companies choose to expense-off R&D cost and another 4 (8.7%) companies choose both capitalize and expense-off R&D cost. For the total of 1 small company, there is 1 (100.0%) company choose to capitalize R&D cost.

Table 4.1.4 Size of Company*Accounting Treatment of R&D Cross-tabulation 2009

Accounting Treatment of R&D

Total

capitalization

expense off

capitalization & expense off

Size of Company

large(>RM5m)

39

3

3

45

small(<RM5m)

0

1

1

2

Total

39

4

4

47

Table 4.1.4 shows the results for the year 2009. In year 2009, among the total of 45 large companies, there are 86.7% or 39 companies choose to capitalize R&D cost, 6.7% or 3 companies choose to expense-off R&D cost and another 6.7% or 3 companies choose both capitalize and expense-off R&D cost. Among the total of 2 small companies, 0% or no company choose to capitalize R&D cost, 50% or 1 of company choose expense-off R&D cost and another 50% or 1 company choose both capitalize and expense-off R&D cost.

4.1.3 Profitability

Figure 4.1.4 Profitability 2008

Figure 4.1.5 Profitability 2009

Figure 4.1.4 shows the frequency and percentage of the profitability for year 2008. There are 30 companies having positive profitability, which consists of 64.0%. In other words, remaining of 17 (36.0%) companies is having negative profitability. For the year 2009, the frequency and percentage shows in figure 4.1.5. There are 25 (53.0%) companies having positive profitability and remaining 22 (47.0%) companies having negative profitability. These shows reduce of 5 (10.6%) companies having positive profitability from year 2008 to year 2009.

Table 4.1.5 Profitability*Accounting Treatment of R&D Cross-tabulation 2008

Accounting Treatment of R&D

Total

capitalization

expense off

capitalization & expense off

Profitability

positive

23

4

3

30

negative

16

0

1

17

Total

39

4

4

47

Table 4.1.5 is the cross-tabulation for profitability and accounting treatment for R&D cost for year 2008. In 2008, there are 23 (76.7%) companies choose to capitalize R&D cost, 4 (13.3%) companies choose to expense-off R&D cost and 3 (10.0%) companies choose to capitalize and expense-off R&D cost among the total of 30 (100%) companies which having positive profitability. Among the total of 17 companies which having negative profitability, there are 16 (94.1%) companies choose to capitalize R&D cost and 1 (5.9%) company choose both capitalize and expense-off R&D cost.

Table 4.1.6 Profitability*Accounting Treatment of R&D Cross-tabulation 2009

Accounting Treatment of R&D

Total

capitalization

expense off

capitalization & expense off

Profitability

positive

21

3

1

25

negative

18

1

3

22

Total

39

4

4

47

Table 4.1.6 shows the result for year 2009. In 2009, among the total of 25 companies which have positive profitability, 84.0% or 21 companies capitalize R&D cost, 12.0% or 3 companies expense-off R&D cost and 4.0% or 1 company choose both capitalize and expense-off R&D cost. There are 18 (81.8%) companies which have negative profitability choose to capitalize R&D cost, 1 (4.5%) company chooses to expense-off R&D cost and 3 (13.6%) companies choose both capitalize and expense-off R&D cost.

4.1.4 Return On Equity (ROE)

Figure 4.1.6 Return On Equity 2008

Figure 4.1.7 Return On Equity 2009

Figure 4.1.6 shows the frequency and percentage of return on equity for the companies for year 2008. The results shows that 29 companies having positive ROE, which consists of 62.0%. The remaining of 18 companies having negative ROE, which consists of 38.0%. Figure 4.1.7 shows the frequency and percentage of ROE for year 2009. There are 24 companies having positive ROE, which consist of 51.0%. In other words, 23 companies are having negative ROE, which consists of 49.0%. There are reduce of 5 companies that having positive ROE.

Table 4.1.7 Return On Equity*Accounting Treatment of R&D Cross-tabulation 2008

Accounting Treatment of R&D

Total

capitalization

expense off

capitalization & expense off

Return on Equity

positive

22

4

3

29

negative

17

0

1

18

Total

39

4

4

47

Table 4.1.7 is the cross-tabulation for ROE and accounting treatment for R&D cost for year 2008. There are 29 companies having positive ROE and 18 companies having negative ROE in year 2008. For the companies having positive ROE, there are 22 (75.9%) companies choose to capitalize R&D cost, 4 (13.8%) companies choose to expense-off R&D cost and 3 (10.3%) companies choose both capitalize and expense-off R&D cost. For the total of 18 companies having negative ROE, there are 17 (94.4%) choose to capitalize R&D cost and 1 (5.6%) company choose to both capitalize and expense-off R&D cost.

Table 4.1.8 Return On Equity*Accounting Treatment of R&D Cross-tabulation 2009

Accounting Treatment of R&D

Total

capitalization

expense off

capitalization & expense off

Return on Equity

positive

20

3

1

24

negative

19

1

3

23

Total

39

4

4

47

The result for year 2009 shows in Table 4.1.8. In 2009, there are a total of 24 companies which have positive ROE. 20 (83.3%) of companies choose to capitalize R&D cost, 3 (12.5%) of companies choose to expense-off R&D cost and 1 (4.2%) companies choose both capitalize and expense-off R&D cost. Among the total of 23 companies which have negative ROE, 19 (82.6%) of companies choose capitalize, 1 (4.3%) of company choose to expense-off and 3 (13.0%) of companies choose both capitalize and expense-off R&D cost.

4.1.5 Leverage

Figure 4.1.8 Leverage 2008

Figure 4.1.9 Leverage 2009

Figure 4.1.8 shows the frequency and percentage for the year 2008. There are 4.0% or 2 companies having leverage for more than 100%. In other words, there are 96.0% or 45 companies having leverage for less than 100%. Figure 4.1.9 shows the results for year 2009. There are 2.0% or 1 company having leverage for more than 100%. In other words, there are 98.0% or 46 companies having leverage for less than 100%.

Table 4.1.9 Leverage *Accounting Treatment of R&D Cross-tabulation 2008

Accounting Treatment of R&D

Total

capitalization

expense off

capitalization & expense off

Leverage

more than 100%

2

0

0

2

less than 100%

37

4

4

45

Total

39

4

4

47

Table 4.1.9 is the cross-tabulation for leverage and accounting treatment for R&D cost for year 2008. There are 2 companies which have leverage more than 100% and 45 companies having leverage less than 100% in 2008. All of the 2 (100%) companies which having leverage more than 100% choose to capitalize R&D cost. For the companies which having leverage less than 100%, there are 82.2% or 37 companies choose to capitalize R&D cost, 8.9% or 4 companies choose to expense-off R&D cost and another 8.9% or 4 companies choose both capitalize and expense-off as accounting treatment for R&D cost.

Table 4.1.10 Leverage *Accounting Treatment of R&D Cross-tabulation 2009

Accounting Treatment of R&D

Total

capitalization

expense off

capitalization & expense off

Leverage

more than 100%

1

0

0

1

less than 100%

38

4

4

46

Total

39

4

4

47

The result for year 2009 shows in table 4.1.10. Among the 1 company which has leverage more than 100% choose to capitalize R&D cost. For the total of 46 companies which have leverage less than 100%, 82.6% or 38 of companies choose to capitalize R&D cost, 8.7% or 4 of companies choose to expense-off R&D cost and another 8.7% or 4 of companies choose both capitalize and expense-off R&D cost.

4.1.6 Cash Flow from Operation

Figure 4.1.10 Cash Flow from Operation 2008

Figure 4.1.11 Cash Flow from Operation 2009

Figure 4.1.10 shows the frequency and percentage of the cash flow from operation for year 2008. The results show 66.0% or 31 companies having positive cash flow from operation. In other words, there are 34.0% or 16 companies having negative cash flow from operation. The frequency and percentage of cash flow from operation for 2009 show in figure 4.1.11. There are 63.8% or 30 companies having positive cash flow from operation and 36.2% or 17 companies having negative cash flow from operation. These shows reduce of 2.1% or 1 company having positive cash flow from operation.

Table 4.1.11 Cash Flow from Operation *Accounting Treatment Cross-tabulation 2008

Accounting Treatment of R&D

Total

capitalization

expense off

capitalization & expense off

Cash Flow from Operation

positive

24

4

3

31

negative

15

0

1

16

Total

39

4

4

47

Table 4.1.11 is the cross-tabulation for cash flow from operation and accounting treatment for R&D cost for year 2008. In 2008, there are 31 companies having positive cash flow in operation, 77.4% or 24 companies choose to capitalize R&D cost, 12.9% or 4 companies choose to expense-off R&D cost and remaining 9.7% or 3 companies choose both capitalize and expense-off as the accounting treatment for R&D cost. For the total of 16 companies which having negative cash flow from operation, there are 93.8% or 15 of companies choose to capitalize R&D cost and 6.3% or 1 of company choose both capitalize and expense-off R&D cost.

Table 4.1.12 Cash Flow from Operation *Accounting Treatment Cross-tabulation 2009

Accounting Treatment of R&D

Total

capitalization

expense off

capitalization & expense off

Cash Flow from Operation

positive

24

3

3

30

negative

15

1

1

17

Total

39

4

4

47

Table 4.1.12 shows the result for year 2009. Among the total of 30 companies which have positive cash flow from operation, 80% or 24 of companies choose to capitalize R&D cost, 10% or 3 of companies choose to expense-off R&D cost and another 10% or 3 of companies choose both capitalize and expense-off R&D cost. For the total of 17 companies which have negative cash flow from operation, 88.2% or 15 companies choose capitalize R&D cost, 5.9% or 1 company choose expense-off and remaining 5.9% or 1 company choose both capitalize and expense-off R&D cost.

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