Case Analysis Of Earnings Management By Capitalizing R&D Expenditure

The pharmaceutical business,which has a significant impact on how people live,has grown quickly and gradually entered the global market.The state is advancing the pharmaceutical industry reform by enacting various medical insurance policies,which not only ensure that people have access to treatment-related medications but also progressively raise the standards for the pharmaceutical manufacturing sector.Only by increasing R&D investment and improving their own innovation ability can pharmaceutical enterprises gain advantages in the increasingly fierce market competition and achieve rapid development.With the increasing attention of the state and enterprises to R&D,how to scientifically and reasonably measure the R&D expenditure of pharmaceutical manufacturing enterprises in their financial statements has drawn considerable interest from all spheres of society.China’s current accounting standards stipulate that enterprises’ R&D projects should be capitalized conditionally,but there are some problems in practice,such as strong subjectivity of judgment criteria,which also provides operating space for some enterprises to use R&D expenditure capitalization for earnings management out of motives such as contract,political cost and capital market.Excessive earnings management will distort accounting data,harm debtors’ and investors’ interests,and interfere with the securities market’s ability to operate in a disciplined manner.Studying the capitalization earnings management of R&D expenditure in pharmaceutical manufacturing businesses is thus reasonable and essential.The case study is based on information asymmetry theory,principal-agent theory and signaling theory,and uses literature research,case study and econometric modeling methods to identify and measure the anomalies of SC Pharmaceuticals,a small and medium-sized enterprise producing peptide drugs in the pharmaceutical industry,in terms of its continuous years of exchange inquiry letters,its own high capitalization rate and net profit.We identify and measure the surplus management of SC Pharmaceutical using capitalization of R&D expenditures,starting from the anomalies such as its continuous years of exchange inquiry letters,its own high capitalization rate,and alternating net profits and losses over the years.By analyzing its R&D expenditures through annual reports and financial statement data,it was found that the case company has poor R&D stability,fluctuating R&D intensity,and meticulous criteria for dividing R&D project schedules.In conducting the empirical identification of surplus management,comparable enterprises in the same industry were selected for cross-sectional comparison and analysis,and it was found that the difference between the R&D intensity of the two was small,but the capitalization degree of the case enterprise was much larger than that of comparable enterprises in the same industry.Longitudinal analysis using historical data of the case companies reveals that there is a correlation between the capitalization rate of R&D expenditures and net profit as well as net profit after deductions with changes.Based on the empirical identification,it is concluded that the case,the enterprise is overly aggressive in capitalizing R&D expenditure,and the use of R&D expenditure capitalization for surplus management is possible.Through empirical identification and model measurement analysis,we conclude that they have engaged in surplus management for capital market,political purposes,and contractual motives between 2015 and 2021,and make relevant recommendations based on the findings to help SC Pharmaceuticals and even other comparable companies to essentially improve their profitability and operating conditions and achieve sustainable and benign corporate development,as well as to provide assistance to statement users to protect It also helps users of the statements to protect their own interests and achieve effective decision-making.