Financial reporting regulation and small research-intensive firms

Reporting rules required by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) have a retarding effect on small business capital formation. The SEC has recently become concerned with impediments to capital formation arising from the high cost of compliance with its rules, and has held hearings on problems of small businesses. In 2 important instances the impact of uniform accounting measurement rules on small businesses has been considered: 1. controversy about the single most appropriate method to use for measuring the effects of the tax savings arising from the investment credit, and 2. the FASB deliberation on the appropriate measurement rule for the accounting of unsuccessful drilling and exploration costs in the oil and gas industry. The appropriate uniform method to account for research and development (R & D) became grounds for debate in the early 1970s. Tests conducted on the economic effects of expensing only (rather the deferring) indicate an association between the decline of R & D outlays for affected firms and the effective data of FASB Statement No. 2 (expense only). This empirical evidence suggests that the rule should be reviewed.