Did SFAS 141/142 improve the market’s understanding of net assets, goodwill, or other intangible assets?

Abstract

Statement of Financial Accounting Standards nos. 141 and 142 eliminated the pooling method of accounting for acquisitions and altered the accounting for intangible assets, respectively. The Financial Accounting Standards Board (FASB) asserts that as a result of these changes financial statement users (i.e., market participants) will be “better able to understand the investments” made and have an improved “ability to assess the future profitability and cash flows” derived from these assets. In this paper, we address whether the FASB accomplished its goals with these new standards. We utilize an OLS regression to assess investors’ ability to forecast a firms’ future performance and to determine whether the information related to these accounting changes are impounded into market prices. The overall evidence partially supports FASB’s assertion of providing better information. While there is a significant improvement in market participants’ ability to assess the future economic benefits associated with goodwill, there does not appear to be any improvement in the market’s ability to understand the future implications of other intangible assets or net assets in general.