Intangible Assets: Diversity of Practices and Potential Impacts from AIFRS Adoption

The adoption of Australian equivalents of International Financial Reporting Standards (AIFRS) radically alters Australian accounting practices for intangible assets. Under AIFRS, goodwill amortisation expense is replaced by goodwill impairment loss based on frequent tests of the value of goodwill, and Australian firms are no longer permitted to recognise certain internally generated intangibles. This paper provides statistics regarding intangible asset reporting by 476 firms listed on the Australian Stock Exchange in 2002. We find significant diversity in reporting practices relating to both goodwill and identifiable intangible assets. Accordingly, the new accounting rules will potentially reshape ASX-listed firms' financial statements by significant amounts.     

Adoption of International Financial Reporting Standards: Impact on the Value Relevance of Intangible Assets

We examine whether the value relevance of reported intangibles differs between financial reporting regimes pre- and post-adoption of Australian Equivalents to International Financial Reporting Standards (AIFRS) and Australian Accounting Standards (AGAAP) respectively. Using AIFRS and AGAAP measures of goodwill and identifiable intangible assets for the same financial year and testing their association with share prices, we find evidence that AIFRS generally convey incremental useful information for investors about goodwill. For aggregated identifiable intangible assets there is no evidence that AIFRS conveys information beyond that in AGAAP. In contrast, we find evidence that AGAAP provides incremental information for investors in relation to identifiable intangibles, but not goodwill .     

Intangible assets and value relevance: Evidence from the Portuguese stock exchange

We assess the value relevance of the amounts for identifiable intangible assets and goodwill reported in the financial statements of all non-finance companies listed on the main market of the Portuguese Stock Exchange from 1998 to 2008. Additionally, we use panel data to explore the impact on value relevance of Portugal’s formal adoption of International Accounting Standards [IAS] and International Financial Reporting Standards [IFRS] in 2005. A distinctive feature of the accounting by our sample companies is that when they adopted IAS 38 and IFRS 3 in 2005, they were no longer required to recognise some intangible assets (such as start-up costs and research expenditures) and were no longer required to amortise goodwill.We find that net earnings, reported goodwill and other intangible assets are highly significantly associated with stock price. However, whereas earnings are related positively to stock prices when Portuguese Generally Accepted Accounting Principles (GAAP) were applied prior to 2005, the value relevance of earnings appears to have declined after the adoption of IAS/IFRS in 2005. Although the change to IAS/IFRS had no impact on the value relevance of identifiable intangibles as a whole, the evidence suggests that there was a positive effect on the value relevance of goodwill. When the subclasses of identifiable intangible assets are considered, we found evidence of an increase in value relevance of goodwill, other intangible assets, and research and development expenditures.     

Impact of IFRS in New Zealand on Accounts and Earnings Quality

The impact of the adoption of International Financial Reporting Standards (IFRS) on the accounts and the quality of earnings of New Zealand firms is examined. Our analysis of IFRS adjustments for the last period under pre‐IFRS NZ Generally Accepted Accounting Principles (GAAP) reveals that total assets, total liabilities and net profit were significantly higher under IFRS than under pre‐IFRS GAAP. Profit and equity under IFRS were increased by adjustments for goodwill and other intangibles and investment property, and decreased by adjustments for employee benefits and share‐based payments. Using data for 2002–2009, we find that absolute discretionary accruals were significantly higher under IFRS than under pre‐IFRS NZ GAAP, suggesting lower earnings quality under IFRS than under pre‐IFRS NZ GAAP. However, we find no significant differences in signed discretionary accruals and the ability of earnings to predict one‐year‐ahead cash flows between pre‐IFRS NZ GAAP and IFRS. These results are consistent across alternative measures of accruals quality, sample selection and whether firms elected to adopt IFRS in 2005 rather than comply with them in 2007.     

Management incentives to recognise intangible assets

The paper examines whether the introduction of the international financial reporting standards (IFRS) in Australia changed management incentives to recognise intangible assets. We examine post‐IFRS changes in managerial opportunism and economic benefits associated with the recognition of intangible assets. We find evidence after IFRS of significant change in intangible asset recognition concurrent with share issues. We also find that the association between economic benefits and intangible assets changed following IFRS. Evidence is provided that the economic benefits associated with goodwill were enhanced by IFRS, whereas IIA and E&E asset information became less useful to financial report users.     

Does a goodwill impairment regime better reflect the underlying economic attributes of goodwill?

IFRS adoption transformed the accounting treatment for goodwill in many countries. Instead of amortizing goodwill, firms now test for its impairment and write off impairment losses against income. Accounting standard‐setting bodies claim that an impairment regime better reflects the underlying economic value of goodwill than systematic amortization. We investigate this claim by comparing the association between goodwill accounting charges against income and firms’ economic investment opportunities in amortization and impairment regimes. We find that the association between firms’ goodwill charges against income and the firms’ investment opportunities is stronger during the IFRS regime than the AGAAP regime. This indicates that, as claimed, impairment charges better reflect the underlying economic attributes of goodwill than do amortization charges.     

The Effects of International Financial Reporting Standards on the Accounts and Accounting Quality of Australian Firms: A Retrospective Study

We examine the effect of Australian equivalents to International Financial Reporting Standards (IFRS) on the accounts and accounting quality of 1,065 listed firms, relying on retrospective reconciliations between Australian Generally Accepted Accounting Principles (AGAAP) and IFRS. We find that IFRS increases total liabilities, decreases equity and more firms have earnings decreases than increases. IFRS earnings and equity are not more value relevant than AGAAP earnings and equity and while adjustments for changes in accounting for provisions and intangibles other than goodwill are value relevant, they weaken associations with market value. Goodwill adjustments improve associations with market value. We also find that the reconciliation note for the earnings adjustments contained no new information.     

The Recognition of Goodwill and Other Intangible Assets in Business Combinations – The Portuguese Case

In this study, we investigate the magnitude of goodwill recognised in business combinations during the years 2005 to 2009 by the Portuguese companies listed on Euronext Lisbon, and characterise the amount of the other intangible assets recognised separately from goodwill. We also analyse the level of compliance of those companies with the main disclosure requirements of International Financial Reporting Standard (IFRS) 3 – Business Combinations. Our study, which involves the analysis of 197 business combinations, reveals that the amounts of goodwill continue to be highly material, while conversely, the value of identifiable intangible assets in those acquisitions is very low. The results suggest that Portuguese companies do not undertake sufficient efforts to individually identify and disclose intangibles acquired in business combinations. This fact is reinforced by the reduced level of compliance with the disclosures required by IFRS 3, particularly the factors that contribute to the recognition of goodwill. Our findings provide feedback to standard setters in an effort to improve practice in the application of IFRS 3. Moreover, they reinforce their recent concerns regarding the post‐implementation review of business combinations, as well as the ongoing project of the IASB, whose objective is to improve disclosures in existing standards.     

An Empirical Investigation of Accounting Methods for Goodwill and Identifiable Intangible Assets: 1985 to 1989

Accounting for intangible assets represents one of the more controversial accounting standards issues. This study examines the accounting policies adopted for goodwill and for identifiable intangible assets by a sample of 150 Australian Stock Exchange listed companies over the five-year period 1985 to 1989 inclusive. Findings reveal a general decrease in the diversity of goodwill accounting policies over the study period but the converse for identifiable intangible policies. In particular, an increase in the percentage of companies electing not to amortize identifiable intangibles was found. The study provides evidence to support claims that companies have been recognizing identifiable intangibles to reduce the impact on reported operating profits of the requirement of accounting standards for the amortization of goodwill.     

Better Late than Never,the Timing of Goodwill Impairment Testing in Australia

The International Financial Reporting Standards (IFRS) goodwill impairment testing regime has been in place in Australia for almost a decade. One of the burning issues arising from the adoption of the IFRS regime is whether firms have impaired goodwill in a timely manner. This study examines the timing of goodwill impairment decisions in the Australian context during the period 2007 to 2009. It is evident that a non‐trivial number of firms did not impair goodwill as called for under the standard governing asset impairment.     

Estimation of Tax Values Based on IFRS Information: An Analysis of German DAX30 and Austrian ATX Listed Companies

Although tax values of corporate assets and liabilities could provide useful information for various economic decisions, they are typically unknown to financial statement users. Additional corporate tax information has been repeatedly claimed. We analyse whether tax balance sheets can be reconstructed using tax information provided by consolidated IFRS accounts. Our results suggest that, for DAX30 firms, the most important differences between IFRS and tax reporting occur for intangibles and provisions. For ATX companies, diverging IFRS and tax rules relating to fixed assets and provisions are the main cause for IFRS–tax differences. We find evidence that book values reported in IFRS balance sheets are generally higher than tax values. Only in connection with inventories, we observe that the median of estimated tax values is higher than IFRS-book value for both Austrian and German groups. We also try to estimate the total stock of unused tax losses because it offers information about a company's potential loss offsets and future tax payments. Our analyses show that estimated values of tax losses often do not differ substantially from the actual stock of tax losses. Due to several methodological and practical problems, we conclude that, especially for multinationals, reconstructed tax balance sheets should be critically scrutinised.     

The value relevance and reliability of reported goodwill and identifiable intangible assets

We examine the value relevance and reliability of reported goodwill and identifiable intangible assets under Australian GAAP from 1994 to 2003; a period characterised by relatively restrictive accounting treatment for goodwill and relatively flexible accounting treatment for identifiable intangible assets. Our findings, using an adaptation of Feltham and Ohlson (1995), suggest that for the average Australian company the information presented with respect to both goodwill and identifiable intangible assets is value relevant but not reliable. In particular, goodwill tends to be reported conservatively while identifiable intangible assets are reported aggressively.     

The value-relevance of adopting IFRS: Evidence from 145 NGAAP restatements

Firms listed on stock exchanges within the European Economic Area are required to report consolidated financial statements according to International Financial Reporting Standards (IFRS) since 2005. The firms that adopted IFRS in 2005 were also required to restate their 2004 financial statements from national GAAP to provide comparable accounting figures. These two sets of financial statements for 2004 are thus based on identical underlying economic activities and are fully specified according to two different reporting regimes. Our sample consists of 145 restatements from Norwegian Generally Accepted Accounting Principles (NGAAP) to IFRS for firms listed on the Oslo Stock Exchange in Norway. We test whether the IFRS accounting figures correlate more strongly with stock market values than the corresponding NGAAP figures. We find little evidence of increased value-relevance after adopting IFRS when comparing and evaluating the two regimes unconditionally. On the other hand, when evaluating the change in the accounting figures from NGAAP to IFRS, we find evidence that the reconcilement adjustments to IFRS are marginally value-relevant due to increased relevance of the balance sheet and the normalized net operating income. By weighting our sample by firm size, intangible asset intensity and profitability, we learn that the increased value-relevance of the net operating income stems from different reporting of intangible assets. Since more intangible assets are capitalized according to IFRS than NGAAP, our finding is consistent with the view that capitalizing intangible assets is more value-relevant than expensing them as incurred or through goodwill amortization.     

What Explains the Valuation Difference between Intangible‐intensive Profit and Loss Firms?

Prior research suggests that loss firms are valued based on their abandonment/adaptation option values, while profit firms are valued as going concerns. However, conservative accounting treatment of expensing of R&D leads many R&D‐intensive firms to report losses even though they are not in financial distress. In this paper we investigate the difference in valuation of profit and loss firms that invest in intangibles, either through internal development (R&D) or purchases. The accounting treatment for internally developed intangibles is conservative in that US GAAP requires immediate expensing. Yet, it allows recognition of purchased intangibles. We find that in valuation of firms with high recognized‐intangible assets, book value has more prominence in loss firms than profit firms, while that is not the case for firms with high R&D expenditures. This suggests that their abandonment/adaptation option explains the difference in valuation between profit and loss firms with high recognized‐intangibles, while conservative accounting explains the valuation difference between profit and loss firms with high R&D intensity. This result suggests that recognition of intangibles in financial statements might mitigate the conservative bias in accounting numbers.     

Intangible Assets, Information Complexity, and Analysts' Earnings Forecasts

Abstract:   We examine the relation between analysts' earnings forecasts and firms' intangible assets, including technology‐based intangibles, brand names, and recognized intangibles. We predict that high information complexity of intangible assets increases the difficulty for analysts to assimilate information and increases analysts' forecast error of intangibles‐intensive firms. We find a positive association between analysts' forecast error and the firm's intangible intensity that deviates from the industry norm. We also find that analysts' forecast errors are greater for firms with diverse and innovative technologies. In contrast, analysts' forecast errors are smaller for biotech/pharmaceutical and medical equipment firms that are subject to intangibles‐related regulation.     

Value relevance of customer-related intangible assets

This study examines the stock market's valuation of customer-related intangible assets for a sample of publicly-traded U.S. firms. Customer-related intangible assets are found to be positively associated with equity prices, but valued at a discount relative to goodwill. These results suggest that value-relevant information is lost if customer-related intangible assets are subsumed into goodwill rather than being reported separately. This evidence can be useful to standard setters potentially considering extending to public companies a recent FASB Accounting Standards Update allowing private companies not to recognize separately from goodwill certain customer-related intangible assets.     

The Relevance to Firm Valuation of Capitalising Intangible Assets in Total and by Category

Debate about the appropriate treatment of intangible assets can benefit from knowledge about the relevance of their financial statement capitalisation to valuation of firms. With rules permitting or requiring intangible asset capitalisation, Australia provides an ideal setting to obtain this evidence. This paper reports findings that indicate that capitalisation of intangibles is value-relevant for Australia's largest firms. Results indicate that investors place greater value on capitalised goodwill than on other categories of capitalised balance sheet items. Similarly, capitalisation of identifiable intangible assets adds value to large firms. However, research and development capitalisation does not affect the value of firms in our study.     

High-Technology Intangibles and Analysts' Forecasts

This study examines the association between firms' intangible assets and properties of the information contained in analysts' earnings forecasts. We hypothesize that analysts will supplement firms' financial information by placing greater relative emphasis on their own private (or idiosyncratic) information when deriving their earnings forecasts for firms with significant intangible assets. Our evidence is consistent with this hypothesis. We find that the consensus in analysts' forecasts, measured as the correlation in analysts' forecast errors, is negatively associated with a firm's level of intangible assets. This result is robust to controlling for analyst uncertainty about a firm's future earnings, which we also find to be higher for firms with high levels of internally generated (and expensed) intangibles. Given that analyst uncertainty increases and analyst consensus decreases with the level of a firm's intangible assets, we also expect and find that the degree to which the mean forecast aggregates private information and is more accurate than an individual analyst's forecast increases with a firm's intangible assets. Finally, additional analysis reveals that lower levels of analyst consensus are associated with high-technology manufacturing companies, and that this association is explained by the relatively high R&D expenditures made by these firms. Overall, our results are consistent with financial analysts augmenting the financial reporting systems of firms with higher levels of intangible assets (in terms of contributing to more accurate earnings expectations), particularly R&D-driven high-tech manufacturers.     

How to improve IFRS for intangible assets? A milestone approach

This study focuses on the decreasing relevance of financial information associated with current financial reporting standards for intangible assets. We summarize and compare three approaches to improving financial reporting standards for internally generated intangibles—the recognition approach, the fair value approach and the disclosure approach, among which we focus on the recognition approach. We investigate the impact of current International Accounting Standard 38 on the R&D capitalization policies of the high-tech industry, particularly among medical device firms in China. We conclude that the current recognition criteria are so stringent that they disincentivize firms from capitalizing their R&D investments. A large variation exists in capitalization timing within the medical device industry. Accordingly, we propose the milestone approach to revising financial reporting standards for intangible assets. We suggest that determining the capitalization criteria for intangibles based on the R&D cycle and capitalization timing should be moved forward.     

Market reaction to and valuation of IFRS reconciliation adjustments: first evidence from the UK

We investigate the market reaction to, and the value-relevance of, information contained in the mandatory transitional documents required by International Financial Reporting Standards 1 (2005). We find significant negative abnormal returns for firms reporting negative earnings reconciliation. Although the informational content of the positive earnings adjustments is value-relevant before disclosure, for negative earnings adjustments it is value-relevant only after disclosure. This finding is consistent with managers delaying the communication of bad news until IFRS compliance. A finer model shows that adjustments attributed to impairment of goodwill, share-based payments, and deferred taxes are incrementally value-relevant but that only the impairment of goodwill and deferred taxes reveal new information. Our results indicate that mandatory IFRS adoption alters investors’ beliefs about stock prices.