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 .     

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 adoption of IFRS in Australia: The case of AASB 138 (IAS 38) Intangible Assets

AASB 138 Intangible Assets, adopted by reporting entities in Australia for annual reporting periods beginning on or after 1 January 2005, required derecognition of internally generated intangible assets. Prior to its adoption, the standard was widely expected to have a substantial impact on the reports of affected listed entities. On the basis of information available in the 2004/05 annual reports, this paper projects the expected effects of AASB 138 on reported intangible assets and on key financial measures. It compares these projected measures to the realised measures, reported under both Australian GAAP and AIFRS in the 2005/06 reports. While reported intangible assets and the debt to equity ratio were expected to change significantly as a result of AASB 138, the reported AIFRS results show a significant change in only the debt to equity ratio. The paper considers reasons why the pre-adoption expected changes did not eventuate, and also how the actual changes were reported to stakeholders in the management discussion sections of the annual reports. The conclusion draws implications regarding the transparency of communication in annual reports.     

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.     

Intangible assets,IFRS and analysts’ earnings forecasts

We investigate whether the adoption of International Financial Reporting Standards (IFRS) in 2005 by Australian firms has been associated with a loss of potentially useful information about intangible assets. We find that the negative association between the accuracy and dispersion of analysts’ earnings forecasts and aggregate reported intangibles previously documented by Matolcsy and Wyatt (2006 ) becomes stronger subsequent to IFRS adoption, primarily for firms with high levels of underlying intangible assets. Our result is largely attributable to reported goodwill, rather than other intangible assets, suggesting that the impairment approach to goodwill valuation required by IFRS conveys more useful information than does the former straight‐line amortization approach. When we investigate a sub‐sample of firms that report lower intangibles under IFRS than under the prior Australian GAAP, we do find some evidence consistent with a loss of useful information relating to intangibles.     

REACTIONS TO REGULATION OF ACCOUNTING FOR GOODWILL

Regulations designed to achieve “uniformity in practice” in Australian firms' reporting of goodwill were first adopted in 1985 with the introduction of AAS18. Because of the requirement to amortise purchased goodwill, a number of firms either did not comply or took evasive actions to mitigate the effects of the standard. This paper documents and explains the pre-regulation cross-sectional variation in accounting practices. Reactions to the set of regulations introduced between 1985 and 1989 are then described and explained through a longitudinal study of accounting policy choice. We develop hypotheses which explain why the goodwill accounting rules reversed relations between the accounting methods adopted by firms and both the earnings effect of compliance and the market value of the firm's goodwill. The results are confirmatory.     

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.     

Capitalized intangibles and financial analysts

We examine whether firms that capitalize a higher proportion of their underlying intangible assets have higher analyst following, lower dispersion of analysts’ earnings forecasts and more accurate earnings forecasts relative to firms that capitalize a lower proportion. Under Australian generally accepted accounting principles, capitalization of intangible assets has become increasingly ‘routine’ since the late 1980s. It is predicted that this experience leads Australian analysts to expect firms with relatively more certain intangible investments to signal this fact by capitalizing intangible assets. Our results are consistent with this. We find that capitalization of intangible assets is associated with higher analyst following and lower absolute earnings forecast error for firms with a stock of underlying intangible assets. Our tests suggest a weaker association between capitalization and lower earnings forecast dispersion. We conclude that there are benefits for analysts, for management to have the option to capitalize intangible assets. These findings suggest that IAS 38 Intangible Assets and AASB 138 Intangible Assets reduce the usefulness of financial statements.     

Disclosure of Goodwill Impairment under AASB 136 from 2005–2010

An accounting standard for goodwill, AASB 136 Impairment of Assets was implemented in Australia in 2005. However, several issues of compliance with the Standard were noted in the initial adoption periods. This study examines goodwill reporting practices in Australia over the five‐year period from 2005 to 2010. It explores the extent to which Australian listed entities complied with mandatory requirements in relation to impairment testing. Using a sample of 287 Australian listed firms, we found that compliance with the Standard's goodwill allocation requirements generally improved; however, there was still non‐compliance for all reporting periods. Also, there was a tendency for firms to define the same or smaller numbers of cash‐generating units (CGUs) than reporting segments. This suggests the existence of CGU aggregation, which may have the capacity to influence the incidence of goodwill impairment, and thereby the financial position of an entity. Coupled with non‐compliance and a lack of audit attention, compliance issues surrounding goodwill impairment testing under AASB 136 still remain of concern to regulators. The findings are useful to academics, regulators and policymakers because they signal the (lack of) compliance with AASB 136.     

Capitalisation of Intangibles — A Review of Current Practice and the Regulatory Framework

This paper reports on capitalisation practices of Australian managers for a large sample of firms in the 1993–97 period, and on accounting regulatory issues in relation to intangibles during and after this period. The data show diversity in capitalisation practices in 1993–97, which we suggest is a consequence of abstract conceptual bases for capitalisation decisions under the Australian regulatory framework. The analysis indicates the framework retains traditional emphasis on conservatism and reliable measurement while providing managers with substantial accounting discretion to capitalise intangible assets. We conclude there is an imperative for research investigating capitalisation decisions for intangibles to guide any further 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.     

Accounting for Identifiable Intangibles — An Unfinished Standard-Setting Task

Years of debate have failed to produce an Australian consensus on accounting for identifiable intangible assets. The AASB in 1999 re-affirmed its view that assets such as brand names, mastheads, licences and trademarks have depreciable amounts that are required to be depreciated. Meanwhile, the Australian Securities and Investments Commission has increased the pressure on companies to amortise such assets. Following a submission from the Group of 100 and others in May 2000, the AASB resolved to place the topic back on its work program. Current proposals by the FASB to accept non-amortisation of goodwill and other intangibles with indefinite lives has "turned up the heat" for further AASB action.     

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.     

The Impact of Financial Accounting Practices on the Measurement of Profit and Equity: Australia Versus the United States

The purpose of this paper is to make a quantitative comparative analysis of differences between Australian financial reporting practices and U.S. GAAP. The empirical data consist of Form 20-F filings for thirteen Australian incorporated companies for the period 1985–93. Based on prior research, there is a test of the hypothesis that U.S. GAAP is more conservative than Australian financial reporting practice. The results of the empirical analysis offer little support for this hypothesis in the context of the reporting of profit. However, the hypothesis is supported for the reporting of shareholders’ equity. The most frequent and material differences in profits relate to asset measurement, equity consolidation and accounting for intangible assets. Generalizations relating to differences in shareholders’ equity are more difficult to make.     

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.     

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.     

Should More Internally Generated Intangible Assets Be Recognized? A Commentary

This study analyzes whether financial statements should recognize more internally generated intangible assets with particular reference to China. This issue is significant because of the increasing importance of the ‘new economy’ and R&D investment, including in China. We present the current accounting requirements for intangible assets and illustrate that the failure to recognize internally generated intangible assets leads to a high ratio of unrecognized value to market capitalization, known as the asset light phenomenon among firms. We discuss and compare international and Chinese views supporting and opposing the recognition of more internally generated intangible assets. We identify and analyze the major issues in general, and in China particularly, that standard setters and their stakeholders have to consider if more internally generated intangible assets are recognized. We focus on areas of recognition, initial and subsequent measurement, and user reaction. We find that the most critical issues are the separability and measurability of internally generated intangible assets. Based on the issues identified, we discuss initiatives on non-financial disclosure in relation to unrecognized intangible assets and firms’ value creation. The study elucidates the consequences of current accounting standards on internally generated intangible assets and, by identifying the critical issues, contributes to the debate on whether it is best to adopt recognition of internally generated intangible assets or a disclosure-only approach.     

Is older goodwill value relevant?

Although previous research has generally found that goodwill reported in firms’ financial reports is relevant to equity valuation, no known studies have directly examined whether the value‐relevance of purchased goodwill holds as it ages. We examine this issue in the Australian context to determine whether the market attaches different values to the components of Australian firms’ goodwill when it is disaggregated into different ‘ages’. Our results suggest that recently acquired goodwill has information content whereas ‘older’ goodwill does not. Our findings have implications for goodwill accounting practice and recent changes to goodwill accounting standards.     

The Amount and Timing of Goodwill Write-Offs and Revaluations: Evidence from U.S. and U.K. Firms

This paper investigates criticisms that U.S. GAAP had given firms too much discretion in determining the amount and timing of goodwill write-offs. Using 1,576 U.S. and 563 U.K. acquisitions, we find little evidence that U.S. firms managed the amount of goodwill write-off or that U.K. firms managed the amount of revaluations (write-ups of intangible assets). However, our results are consistent with U.S. firms delaying goodwill write-offs and U.K. firms timing revaluations strategically to avoid shareholder approval linked to certain financial ratios.     

Empirical findings from the reconciliations in the first IFRS compliant reports prepared by Japanese-owned subsidiaries in Australia

In Japan, a Japanese version of International Financial Reporting Standards (J-IFRS or JMIS)² will be adopted from March-ending in 2016, but exactly when the IFRS mandate will start is still unknown. The Australian regulators required not only publicly listed companies but also private and foreign-owned entities to prepare their financial statements to comply with Australian IFRS (A-IFRS) on or after 1 January 2005. Around the time of the transition to A-IFRS, more than 400 local subsidiary companies in Australia operated businesses which were invested in by Japanese multinational corporations. Thus, Australia was in a unique place to explore the IFRS reporting practices for Japanese-owned entities. We examined the reconciliations of the accounting figures made under the prior Australian generally accepted accounting principles (AGAAP) to those made under A-IFRS, and explored explanations for the reconciliations stated in the first A-IFRS compliant annual reports. On average, the net profits reported under AGAAP were 13% higher than those measured by A-IFRS for the Japanese subsidiaries, while the matched sample Australian companies' profits were on average 2% lower under AGAAP than the accounting figures reported under A-IFRS. Moreover, we described the following four accounting standards which were most frequently cited in the explanations of the impacts of the A-IFRS implementation: financial instruments, income taxes, provisions and employee benefits. Firstly, this study found that the reporting practices of the Japanese subsidiaries and Australian matched sample firms were less likely to be similar in the same Australian institutional setting. Secondly, the differences of the institutional factors in the countries of origin somewhat influenced the financial reporting of the Australian subsidiaries. Finally, the strict and wide scope of recognition and disclosure requirements under A-IFRS led to a significant increase in assets and liabilities. The monetary values materially changed under AGAAP compared with those made under A-IFRS, but these reporting entities attempted to comply with the new accounting regulations on time. We expect that information disclosure will increase and become more standardised under A-IFRS, compared with under AGAAP.