1.1 Background and objectives There have been concerns that financial statements do not reflect adequately the underpinning drivers of value in modern business (Bernanke 2011; Haskel and Westlake 2017; Lev and Gu 2016). Additionally, International Accounting Standard (IAS) 38 Intangible Assets, which governs the treatment of intangible assets, has been criticised for reflecting prudence and conservatism that encourages the expensing of internally generated intangible assets (Mazzi et al. 2019b). This implies that the accounting treatment of internally generated intangible assets, as prescribed by the standard, exacerbates the perceived lack of intangible assets in companies’ balance sheets.

To shed more light on these conjectures, a study by Mazzi et al. (2019b) has among other things examined the relevant amounts and firm characteristics of a very large sample of firms across the world that capitalise and/or expense research and development (R&D) expenditure, specifically under International Financial Reporting Standards (IFRS). However, in today’s economies, companies increasingly invest in software, develop websites as well as other software (eg applications for mobile phones) for use as part of their operations, but that are not necessarily heavily involved in R&D activities. Thus, firms could find themselves spending significant softwarerelated amounts. Such expenditure should be capitalised, subject to meeting the criteria, and shown as a separate category of intangible assets. As such, prior literature that has examined the capitalisation of development costs more broadly has not separately analysed the relevant costs recognised on companies’ financial statements.

The present study complements and extends the study by Mazzi et al. (2019b) by focusing particularly on software development costs (SDCs), which are governed by the same accounting standard (ie IAS 38). To the best of the authors’ knowledge, research on the frequency and likelihood of SDC capitalisation and relevant amounts capitalised on companies’ balance sheets under IFRS is not available. Furthermore, there is an absence of evidence on the characteristics of firms that are more likely to capitalise such expenditure and on the determinants of the amounts of SDC capitalised. The overall objective of the present research is to shed light on these areas.

1.2 Method By drawing on listed companies from 39 countries (40,241 firm-year observations) that have either converged their national standards to IFRS or adopted IFRS, for the five-year period 2015 to 2019, we have collected and summarised evidence on how many companies capitalise SDCs during the year (capitalisers) and how many report R&D costs in the income statement but do not capitalise SDCs during the year (non-capitalisers). This evidence is provided in aggregate and on a country and industry level. We also provide descriptive statistics of the amounts of SDCs capitalised in a given year relative to market values and the net amounts of SDCs that feature on companies’ balance sheets, relative to total assets, at the end of the year. We then provide results from multivariate regression analysis to identify the country- and firm-level determinants influencing the decision of companies to capitalise SDCs and identifying the factors affecting the magnitude of SDCs capitalised in a given year.

In additional analysis with a separate sample, we explored any differences in the determinants influencing the decision of companies to capitalise SDCs and the factors affecting the magnitude of SDCs capitalised for a sample period that covers the same number of years before and after the implementation of IFRS 3 Business Combinations (Revised) in 2009. Finally, for a relatively small number of firms, we collected companies’ most recent annual reports and, from those, we manually extracted examples of voluntary disclosure and accounting policy notes about capitalisation or expensing of SDCs.