This qualitative and descriptive essay discusses pharmaceutical companies’ financial reporting of research and development expenditures, if separate acquisitions and development expenditure for internally generated intangible assets are expensed or capitalized, and the reason for this.

The problem statements are:

• How do pharmaceutical companies report their development and research expenditures?
• Why do pharmaceutical companies choose to expense or capitalize their separate acquisitions and development expenditures for internally generated intangible assets?

Interviews have been conducted with pharmaceutical companies that comply with IFRS in their consolidated reporting and which conduct research and development. It is internally generated intangible assets and separate acquisitions that are in focus of this study. Since 2005 it is mandatory for publicly listed companies in the EU to apply to IFRS (International Financial Reporting Standards) in their consolidated reporting. Since IFRS rules are principle based this allows for a more flexible application of accounting standards, which contributes to a subjective interpretation.

Expenditures for research and development should be reported either by direct expensing in the income statement or capitalization as an intangible asset in the balance sheet if certain criteria according to IAS 38 are met. Choice of method affects the company´s key ratios along with the balance and income statements and it is the companies themselves which are to determine whether these conditions are met or not.

Institutional theory has been used to establish whether companies’ choice of expensing or capitalizing can be explained through different forms of isomorphism, habits and practices, or if choice of method is based on the organization and its environment´s mutual dependency and how the stake holders will perceive the company.

Evidence shows that it is mainly coercive isomorphism through laws and regulations that govern the choice of method, but also habits and practices as well as mimetic isomorphism to achieve legitimacy affect choice of method.