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 measurement and recognition of intangible assets: then and now

“In the Fortune 500 there are thousands upon thousands of statistics that reveal very little that’s meaningful about the corporations they purportedly describe. At least that’s the verdict of a growing number of forward-thinking market watchdogs, academics, accountants, and others.”(Fortune, April 2001). In today’s economy value is often created by intangible (intellectual) capital. The accounting profession has not met the challenge of measuring and reporting the results of knowledge-based entities. The Federal Reserve Bank of Philadelphia estimates that in the year 2000 more than US$ 1 trillion was invested in Intangibles. The problems relating to the measurement and recognition of intangibles are international in scope.This paper reviews existing and recently promulgated US, UK, and IASC accounting standards relating to Intangibles. Inconsistencies in the measurement and reporting of Intangibles under US Generally Accepted Accounting Principles (GAAP) are highlighted, and evidence is provided that suggests that recognition of Intangible (Intellectual) Capital is in accordance with existing accounting principles In particular, the newly promulgated Financial Accounting Standards Statements on Business Combinations, Goodwill, and other Intangibles is reviewed. The objective of the comparisons to UK and IASC standards and the review is to provide evidence that will improve the measurement and reporting of intangible (intellectual) capital and facilitate harmonization. Improving the global financial reporting infrastructure will ultimately lead to the reporting of relevant and reliable quality earnings.     

The FASB exposure draft on accounting for business combinations and intangible assets: an instructional assignment

Accounting standards are constantly evolving to meet the needs of a rapidly changing business environment and changes in accounting theory. Accounting students need to be familiar with the content of Exposure Drafts, since these documents reflect the Financial Accounting Standards Board's (FASB) position on current financial reporting issues. Students are generally not well versed on the standard setting process and how contextual factors affect this process. The purpose of this instructional assignment is to enhance students' understanding of how contextual factors affect the standard setting process within the context of the Exposure Draft on “Business Combinations and Intangible Assets.” The assignment requires that students examine the Exposure Draft and answer questions designed to elicit responses as to why the FASB is considering a new standard and the impact the standard would have on current accounting procedures and financial statements.     

Compliance with goodwill-related mandatory disclosure requirements and the cost of equity capital

Theory suggests that increased levels of corporate disclosure lead to a decrease in cost of equity via the reduction of estimation risk. We examine compliance levels with International Financial Reporting Standard 3 Business Combinations and International Accounting Standard 36 Impairments of Assets mandated goodwill-related disclosure and their association with firms’ implied cost of equity capital (ICC). Using a sample of European firms for the period 2008–2011, we find a median compliance level of about 83% and significant differences in compliance levels across firms and time. Non-compliance relates mostly to proprietary information and information that reveals managers’ judgement and expectations. Overall, we find a statistically significant negative relationship between the ICC and compliance with mandated goodwill-related disclosure. Further, we split the sample between firms meeting (or not) market expectations about the recognition of a goodwill impairment loss in a given year to study whether variation in compliance levels mainly plays a confirmatory or a mediatory role. We find the latter: higher compliance levels matter only for the sub-sample of firms that do not meet market expectations regarding goodwill impairment. Finally, our results hold only in countries where enforcement is strong.     

The role of investment banks on the impact of firm performance in mergers and acquisitions: evidence from the Asia-Pacific market

This study uses a comprehensive sample of 5271 bidders during the period of 1995–2011 to examine the role of financial advisors on the outcomes of mergers and acquisitions in the Asia Pacific market. The results indicate that bidders take more time to complete deals when hiring tier-3 advisors. In addition, the empirical evidence indicates that bidders obtain higher announcement returns when hiring low reputation financial advisors. The results are robust when controlling for year effects, country effects and self-selection bias. In addition, the regression analysis also reveals that bidders obtain lower post-announcement returns when hiring tier-1 advisors in domestic deals. Thus, the empirical findings illustrate the importance of the quality of financial advisors on firm performance in mergers and acquisitions in the Asia Pacific market.     

The performance of newly privatized firms in selected MENA countries: The role of ownership structure, governance and liberalization policies

The paper analyzes 95 newly privatized firms (NPFs) in four Middle Eastern and North African countries (Egypt, Morocco, Tunisia, and Turkey). We find that these firms experienced significant increases in profitability and operating efficiency, and significant declines in employment and leverage. We also document strong performance improvements for firms that did remain state-owned, that were not sold to foreigners, and that came from Egypt. Job losses are higher in Egypt and in firms where the state is no longer in control. Also, the results indicate that revenue firms and NPFs in Morocco display significantly less leverage than control firms and those from other countries. We find that profitability changes are negatively related to state control and positively related to foreign ownership. Trade openness, change in real GDP over the privatization window, index of investor protection, and foreign ownership are important determinants of the changes in sales efficiency and output. These findings suggest that NPFs become more productive in environments where property rights are better protected and enforced and that foreign investors influence firms' productivity through their monitoring role.