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 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.     

Floriculture du Suroît inc.*

Floriculture du Suroît inc. is a SME in the horticulture field. It cultivates and sells geraniums, but a new subsidiary, Les Roses de Caroline, recently start the culture of roses. Floriculture has just obtained a governmental subsidy and, for the first time, the company will have to produce audited financial statements prepared in accordance with GAAP. Thus, the two owners will have to choose between two accounting frameworks, that is, International Financial Reporting Standards (IFRS) or Canadian Accounting Standards for Private Enterprises (ASPE). Many differences exist between these two frameworks. More specifically, IFRS provide specific standards related to agricultural activity and investment properties, while ASPE do not. In addition, ASPE permit many choices between accounting treatments, which should be carefully analyzed. The owners are neophytes in accounting matter. Thus, they need help for accounting issues.     

Bonbons Hansel et Gretel inc.

Bonbons Hansel and Gretel inc. (BHGI) has acquired all shares of Les délices de Fée Dragée (LDFD). That French private company has made its mark in 50 years with a secret recipe of natural licorice candy that consumers absolutely love. BHGI now possesses an advantage over its domestic competitors with this recipe and the client list of LDFD, but the French factory will need to be refurbished in ten years. During due diligence, BHGI learns that a lawsuit was filed against LDFD. It is time to account for the acquisition and to determine the amount of goodwill. Headaches are anticipated when assessing the fair value of assets acquired, especially when considering the various possible assessment methods and assumptions to be used as input data for valuations approaches.     

Debt contracting and the goodwill debate

Extant literature offers mixed evidence on the quality of goodwill after the promulgation of SFAS 141/2 (Li and Sloan, 2017; Lee, 2011; Chen et al., 2008). We reconcile these conflicting findings by examining the role of managerial incentives in determining the efficacy of SFAS 141/2 in improving the quality of goodwill reporting. Using the context of debt contracting, we find that the value-relevance of goodwill is higher for firms that include goodwill in debt covenants in the post-SFAS 141/2 period. We also find that in the post-period, firms that include goodwill in their debt contracts appear to take timelier impairments. In addition, debt contracts in these firms also have tighter covenant thresholds, further corroborating the increased value-relevance of goodwill under the current impairment regime. We also document a relatively higher frequency of covenant violation for firms that use goodwill in their debt contract in the post-SFAS 141/2 period. Taken together, our results inform ongoing discussions regarding the accounting for goodwill and provide new insight into understanding of debt contracting and the role of accounting standards therein.     

The Case Against Asset Revaluations

The upward revaluation of non-current assets is a common feature of contemporary accounting in Australia. This paper presents a case against the practice. The effects of revaluations are examined and possible reasons why firms revalue are considered. It is argued that asset revaluation is theoretically unsound, being inconsistent with the accounting structure within which it occurs. It is concluded that there are significant costs but few obvious benefits associated with revaluation.     

The SEC's Ban on Upward Asset Revaluations and the Disclosure of Current Values

Prior to 1930, the upward revaluation of fixed assets was common in the United States. By 1940 the practice was virtually extinct, and for decades thereafter U.S. corporations which were registered with the Securities and Exchange Commission (SEC) have been constrained both from making upward asset revaluations, and from presenting supplementary information about the ‘current values’ of fixed assets. These changes were effected without the publication of any rules or guidelines by either the SEC or the U.S. accounting profession. This paper traces the early history of SEC activities and policies in relation to ‘write-ups’, using primary source materials which include minutes of SEC meetings, internal memoranda prepared by SEC staff, and reports of SEC decisions in stop-order proceedings. These documents show that, initially, SEC staff actively ‘discouraged’ write-ups through the exercise of administrative discretion in the course of assessing whether documents filed with the Commission were adequate to support the registration of prospectuses or securities. Later, formal decisions to reject the use of ‘appraisals’ were based on findings that estimates of current values had been arrived at arbitrarily or capriciously. Over a twenty-five-year period no decisions were located which formally rejected write-ups or the disclosure of current values when they were based on defensible estimates of current market prices. However, subsequently these decisions were cited as precedents for the rejection of the use of both ‘appraisals’ and estimates of market prices as the basis for valuing assets in all financial reports lodged with the SEC. By the 1940s, the SEC was using its registration powers to ‘censor'financial statements which referred to estimates of current values, regardless of the evidence used to arrive at those estimates. By the 1950s, the SEC had extended its policy of censorship to prevent any disclosure of estimates of ‘current values’— even when those disclosures were only made in ‘supplementary’ notes in takeover documents.     

Reviewing IFRS Goodwill Accounting Research: Implementation Effects and Cross-Country Differences

We review 42 studies from 2008 to early 2017 about IFRS goodwill accounting choices for recognition, impairment, and disclosure of goodwill, focusing on cross-country evidence of implementation effects. We develop a model of application of goodwill accounting based on IFRS 3, IAS 36, and country- and firm-level influences to analyze the research and to summarize existing evidence about goodwill accounting choices. We report evidence in support of IFRS accounting for goodwill recognition, impairment, and disclosure from many countries. However, evidence regarding value relevance is mixed. Overall, there is a lack of cross-country evidence regarding factors affecting goodwill accounting. Many studies show goodwill recognition, impairment, and disclosure are associated with economic and firm factors, and there is some evidence about the impact of managerial incentives and a lack of timeliness in impairment recognition. There is scope for more cross-country studies showing how institutional factors affect the application of IFRS 3 and IAS 36.     

Pro forma accounting disclosures: The effect of reconciliations and financial reporting knowledge on nonprofessional investors' judgments

Regulation G requires companies that report non-GAAP or “pro forma” earnings provide a reconciliation. While nonprofessional investors are a large, heterogeneous population with varying degrees of financial reporting knowledge, previous research treats them as a homogenous group. The study examines how differences in financial reporting knowledge and information viewing behavior affect the influence of reconciled pro forma earnings disclosures on nonprofessional investors' judgments. Lower-knowledge investors appear to incorporate information on differences between GAAP and pro forma earnings in their judgments as long as they view this information in the reconciliation. However, higher-knowledge investors appear to consistently incorporate information on differences between GAAP and pro forma earnings in their judgments regardless of the relative amount of time they spend viewing the reconciliation relative to other disclosures. Our results suggest that knowledge differences influence how nonprofessional investors acquire and use information on differences between GAAP and pro forma earnings.     

商誉减值准则的变迁及启示:国际视野与中国实践

近年来,我国商誉减值乱象频发,很多上市公司因计提巨额商誉减值导致出现巨额亏损,引发了众多学者对商誉计量的高度关注。由于经济发展存在较大差异,不同国家的商誉准则也有很大区别。国际会计准则委员会、美国会计准则委员会及中国财政部会计准则委员会对有关商誉后续处理方法的准则规定存在很大不同,而大多数学者仅选取其中两者进行对比分析。纵观三者来看,我国商誉准则的变化受国际及美国会计准则委员会的综合影响较大,值得通过对比和分析来获得启示,为我国未来商誉准则的发展提供参考。     

How Do Firms Implement Impairment Tests of Goodwill?

This study seeks first to examine how firms implement impairment tests as required by IAS 36, and second, to explore factors which may explain why some firms are not entirely in compliance with IAS 36. It is based on a survey which includes 58 completed questionnaires representing 73% of the firms on the Copenhagen Stock Exchange that recognize goodwill on the balance sheet. The findings imply a variety in the application of IAS 36. Based on our analysis, it is difficult to determine whether this simply indicates that firms adopt an approach suited to their organizational and economic structures, or if it reveals that firms are uncertain as how to apply the standard. Our analysis further indicates inconsistencies in the implementation of IAS 36. This includes both how firms define a CGU and how they estimate the recoverable amount. Further, multivariate analysis reveals that the inconsistencies detected here are less likely in firms that systematize the procedures for impairment testing and use persons with considerable valuation experience. The findings should be of interest to a number of parties including firms, financial advisers, auditors, standard setters and users of financial statements.     

Fixed Asset Revaluations and Managerial Incentives

The study attempts to explain why Australian companies revalue their fixed assets, when a revaluation, by itself , has no discernible direct effect on cash flows and is costly to carry out. A revaluation is hypothesised to affect contracting and political costs. It may also help resolve problems associated with information asymmetries, or be used to signal information to investors. The results support the proposition that economic forces help explain the decision to revalue assets.     

Peer effect in the initial recognition of goodwill

This study investigates the peer effect in the initial recognition of goodwill. We find that firms imitate their peers in the initial recognition of goodwill. The higher the tendency for imitation, the higher the proportion of goodwill recognized. Imitation behavior in the initial recognition of goodwill cannot be explained by information acquisition or rivalry motivations. Instead, we find evidence that managers’ opportunistic motivations explain the peer effect in the initial recognition of goodwill and the overestimation of goodwill arising from imitation tendencies. Executive overconfidence weakens the peer effect but exacerbates the overestimation of goodwill caused by imitation tendencies. Finally, the higher the imitation tendency, the greater the probability and amount of goodwill impairment in the future. This further confirms that the peer effect leads to overestimation of goodwill. The findings of this study enrich the literature on goodwill and provide insightful empirical evidence for regulating goodwill accounting. The results show that the conservatism principle should be reinforced in the initial recognition of goodwill.     

The role of reconciliation quality in limiting mispricing of non-GAAP earnings announcements by EURO STOXX firms

This empirical study investigates the relationship between the market mispricing of pro forma earnings announcements and the degree to which pro forma earnings are quantitatively reconciled with GAAP (Generally Accepted Accounting Principles) earnings. For a sample of EURO STOXX Fixed Index companies we find evidence of positive abnormal returns related to pro forma earnings disclosures, and, upon further analyses, conclude that this evidence is generally more consistent with the notion of market mispricing than omitted risk factors. Moreover, when reconciliation quality is controlled, market mispricing is found to be prevalent and pronounced only for low quality reconciliations. This finding suggests that reconciliation is important in reducing market mispricing.     

Estimating unobservable valuation parameters for illiquid assets

A problem that often arises in applied finance is one where decision‐makers need to choose a value for some parameter that will affect the cash flows between two parties involved in the operation of an illiquid asset. Because the values of the cash flows also depend on various unobservable parameters, identifying the value of the policy parameter that achieves the desired allocation between the parties is no simple task, often resulting in disputes and the invocation of ad hoc approaches. We show how this problem can be solved using an extension of the well‐known ‘implied volatility’ technique from option pricing, and apply it to the determination of equilibrium rental rates on ground leases of commercial land.     

Bright Pharmaceuticals SE: Accounting for a Business Combination under IFRS 3

This instructional resource familiarizes students with the accounting for business combinations under IFRS 3 and illustrates the uncertainty and professional judgment involved in asset valuation and consolidation. First, students need to assess the quality of information generated under IFRS 3 and fair value accounting. Second, they are asked to account for a business combination by identifying possible input parameters to measure several intangible assets and a contingent liability. Based on their valuation results, they compute the amount of goodwill recognized on the acquisition and assess the effects of their parameter choices on the values of different assets and liabilities. As an optional third task, the case asks students to consolidate the financial statements and evaluate the impact of the acquisition on the financial position of the acquirer.     

浅析企业合并中的负商誉问题

企业合并中负商誉的会计处理问题在各国会计界一直是一个争议的问题,目前国际上共有四种处理惯例,我国在新会计准则中关于负商誉的规定也体现了向国际趋同的目标。本文旨在列示这四种处理方法,并对其进行简略分析,试指出其中存在的不合理之处。