Identifiable Intangible Assets Research Articles

Differences in the value relevance of identifiable intangible assets

Differences in the value relevance of identifiable intangible assets

The response of Australian firms to AASB 138 disallowing the recognition of internally generated identifiable intangibles

AbstractThis paper responds to a call by the Australian Accounting Standards Board to investigate how Australian firms responded to a perceived loss of information pursuant to AASB 138 (IAS38) which mandated the de‐recognition of previously recognised internally generated identifiable intangibles, from its effective date of 1 January 2005. We find that the sample firms did not choose to provide alternative or substitute disclosure elsewhere in their annual report or financial statements anytime during our sample period (2005–2010). Prima facie, this is surprising given prior evidence from the value relevance literature that disclosures relevant to the value of internally generated intangibles are correlated with firm value and presumably informative for investors. However, we caution against the drawing of simple conclusions that this finding implies alternative disclosure may not be valuable. Rather, it is important to understand the forces or frictions that contribute to this result. Schipper (The Accounting Review, 82, 2007, 301) and Skinner (Accounting and Business Research, 38, 2008, 191) offer valuable insights into the potential issues such as the costs of alternative disclosure including proprietary costs of disclosing competitive information and, the lower credibility of financial disclosures outside of audited financial statements. These are important considerations in the on‐going standard‐setting debate on recognition versus disclosure of value relevant information on intangible assets.

Impact on Tax Amortization of Identifiable Intangibles by the 2022 Amendment to Business Mergers and Acquisitions Act

Impact on Tax Amortization of Identifiable Intangibles by the 2022 Amendment to Business Mergers and Acquisitions Act

Investment‐cash flow sensitivity: Evidence from investment in identifiable intangible and tangible assets activities

AbstractIn this study, we examine whether investments in fixed (identifiable) intangible assets and tangible assets are sensitive to cash flow and the extent to which this sensitivity differs for firms with different levels of financial constraints. Using both UK private and public firms' data, our overall analysis shows strong positive (negative) effects of cash flow on intangible assets (tangible assets) investments. When we split the data on the basis of listing status, we observe that cash flow is positively (negatively) and significantly related to intangible assets (tangible assets) investments for private firms but not so for public firms. In addition, we further observe that both public and private firms' investments follow a similar pattern when we split our data based on the availability of internal funds. Moreover, we also find that the sensitivity of investment (identifiable intangible assets) to cash flow is higher for young and large private firms but lower for small and old ones. Our results remain similar to other econometric specifications, which account for possible endogeneity issues.

Customer relationships in the consolidated financial statements: recognition and value relevance

ABSTRACT Customer relationships are important strategic resources. With a sample of A-share listed firms from 2007 to 2020 in China, this paper examines the recognition and value relevance of customer-related intangible assets. Current accounting standards require an acquirer to recognise identifiable intangible assets acquired in the business combination separately from goodwill. However, stakeholders question the usefulness of the information about customer relationships that are difficult to value reliably. The IASB and IFRIC have discussed a lot about whether to continue to separate customer-related intangible assets from goodwill. We find that firms with more R&D investments are more likely to recognise customer-related intangible assets. We also find that the book value of customer-related intangibles is positively associated with share price, which means recognised customer-related intangibles provide useful information to investors. We report empirical evidence in support of both international and Chinese accounting standards for separate recognition of identifiable intangible assets.

Response by the Financial Reporting Policy Committee of the Financial Accounting and Reporting Section of the American Accounting Association to the FASB Invitation to Comment onIdentifiable Intangible Assets and Subsequent Accounting for Goodwill

SYNOPSISIn October 2019, the Financial Reporting Policy Committee of the Financial Accounting and Reporting Section of the American Accounting Association submitted a comment letter to the Financial Accounting Standards Board regarding the accounting for certain identifiable intangible assets acquired in a business combination and subsequent accounting for goodwill. This paper summarizes the content of the comment letter and discusses opportunities for future research on intangible assets that may inform accounting standard-setting decisions.JEL Classifications: M40.

Did the accounting for goodwill create a bubble?

This article investigates the accounting standards changes related to business acquisitions and the impact of those changes on the reported goodwill in the past 50 years. We observe that the amount of goodwill on companies’ balance sheets steadily increased before 2001 but has risen to new levels with the adoption of SFAS 141. Goodwill is now equal to about 30 percent of companies’ net assets compared to only about 7 percent in the 1980s. We examine whether the increased levels of goodwill could have resulted from changes in accounting standards. Specifically, we investigate the impacts of accounting regulations on goodwill reporting under three different regimes: APB 16 and 17, SFAS 141 and 142, and SFAS 141(R). We find that the increase in the reported value of goodwill is not a result of an increase in public companies’ acquisitions, as those have actually decreased over time. Further, the increase overlaps with the changes to the accounting for goodwill and the switch from goodwill amortization to impairment. Our findings are timely and important because the Financial Accounting Standards Board (FASB) has a concurrent project revisiting Identifiable Intangible Assets and Subsequent Accounting for Goodwill (FASB 2020). Our evidence urges caution in the reintroduction of goodwill amortization proposed by FASB, as the level of goodwill has increased dramatically despite FASB’s intentions to improve the quality of goodwill accounting and curtail management’s goodwill manipulation.

A study of value-relevance and reliability of intangible assets: What do we know from the restaurant industry?

Despite the importance of intangible assets in firm valuation, the value-relevance and reliability of intangibles remain unclear. Specifically, intangible assets are critically important to restaurant firms because of the intangible nature of their core services. Thus, this study examined the value-relevance and reliability of intangible assets in the restaurant industry. The results of this study confirmed that goodwill and identifiable intangible assets had significant value-relevance and reliability in association with firm value creation. The results also suggested that intangible assets are significantly related to restaurant firm value, implying that restaurant investors can rely on the intangible information on balance sheets when considering future investments. However, this study found that franchising has a positive moderating effect on the relationship between goodwill and market-based/accounting-based firm value measures, but it does not moderate the relationship between identifiable intangibles and restaurant firm value. This means that the value created by franchising is not fully reflected in the valuation of goodwill, while identifiable intangibles are fairly well valued or at least are not closely related to the value created by franchising. Consequently, the value relevance and reliability of non-franchise restaurants were confirmed. In contrast, although the value reliability of franchise restaurants was confirmed, the value relevance of franchise restaurants was not fully supported.

Accounting for intangibles and intellectual capital: a literature review from 2000 to 2020

AbstractThis article presents the results of a systematic literature review on intangibles and intellectual capital (IC) focusing on articles published in the top 20 accounting journals between 2000 and 2020. We find that North American accounting scholarship during this period has predominantly focused on identifiable intangibles and how these appear in the balance sheet. Much less attention has been given to management issues and IC, even though these issues are more common in European and Australian accounting literature. By evaluating recent developments and trends, this contribution aims at identifying promising avenues for future research endeavours.

Intangible assets and capital structure

A substantial and increasing proportion of corporate assets consists of intangible assets. Despite their growing importance, internally-generated intangible assets are largely absent from balance sheets and other corporate reports. Consequently, the empirical capital structure research has struggled to evaluate the effects of intangible assets on financial leverage. High valuation risk and poor collateralizability of some intangible assets — e.g. goodwill, may discourage debt financing. In contrast, identifiable intangible assets may support debt because they are separately identifiable, valuable, and potentially collateralizable, and are instrumental in generating cash flows. Utilizing a recent accounting rule change that allows us to observe granular market-based valuations of intangible assets, we find a strong positive relation between identifiable intangible assets and leverage. Overall, identifiable intangible assets support debt financing as much as tangible assets do, in particular in firms that lack abundant tangible assets.

On the Need And Ways of Converting Some of the Components of Goodwill Into Identifiable Intangible Assets

This article justifies the need and ways to transfer some types of exclusive rights from goodwill to identifiable intangible assets. On this way, case of national accounting system and theoretical background of the topic were discussed. Moreover, practical issues and literature review of the different point mentioned on the methodology. Finally, research concludes major points in order to make further development as the whole.

On the Need And Ways of Converting Some of the Components of Goodwill Into Identifiable Intangible Assets

This article justifies the need and ways to transfer some types of exclusive rights from goodwill to identifiable intangible assets. On this way, case of national accounting system and theoretical background of the topic were discussed. Moreover, practical issues and literature review of the different point mentioned on the methodology. Finally, research concludes major points in order to make further development as the whole.

Differences in the Value Relevance of Identifiable Intangible Assets Acquired in Business Combinations

Motivated by investor criticisms of current accounting policy, this study investigates whether differences exist in how acquired identifiable intangible assets relate to investors’ expectations about the entity’s future cash flow prospects. Some investors assert that all acquired intangibles should be subsumed within goodwill; while others call for separate recognition from goodwill only when identifiable intangibles are separable from the business, have defined useful lives, and have identifiable revenue streams (i.e., “wasting” intangibles). Still other investors prefer separate recognition of identifiable intangibles only when they are strategically important sources of future cash flows. Consistent with some investor views, we find cross-sectional variation in value relevance based on differences in underlying asset characteristics. Our primary findings suggest that separate recognition of strategically important wasting intangibles provides information different from that provided by goodwill, and that there is no loss of value relevant information if other intangibles are subsumed in goodwill.

The Operating Returns to Acquired Intangible Assets

There is a long-standing debate on the recognition of intangible assets. Proponents of recognition argue intangibles are a key source of value and profitability, while opponents note that recognizing intangibles involves considerable measurement uncertainty. Using a broad sample of business combinations in the U.S. from 2003 to 2014, we find that the recorded values of acquired intangibles are a significant predictor of future operating income at one-, three-, five-, and seven-year horizons, using both in- and out-of-sample tests. Further, the predictive ability of intangibles dominates that of acquired tangibles, with goodwill being more important, but identifiable intangibles contributing as well. However, in cross-sectional tests we find that the predictive ability of intangibles weakens in settings where the relevance and measurement reliability of intangibles are lower. These results are informative to policy makers considering whether the costs of identifying and valuing intangible assets are justified.

Acquisition premiums and the recognition of identifiable intangible assets in business combinations pre- and post-IFRS adoption

PurposeThis paper aims to evaluate the relation between acquisition premiums and amounts recognised as identifiable intangible assets (IIAs) in business combination, in periods before and after transition to International Financial Reporting Standards (IFRS).Design/methodology/approachThis is an empirical archival research using data from business acquisitions.FindingsIn the pre-IFRS period, there is evidence of firms recognising IIAs in business combinations having higher acquisition premiums. This association of acquisition premiums and IIAs ceased with transition to IFRS, notwithstanding the relative latitude provided in accounting standards for the recognition of IIAs.Research limitations/implicationsThis paper complements the study by Su and Wells (2015) which founds little association between IIAs and performance subsequent to business acquisitions prior to transition to IFRS. The results here suggest that it is attributable to overpayment. Problematically, the incentives for opportunism remain and an issue requiring address is whether alternative sources of accounting flexibility in relation to business combinations exist, such as goodwill which is no longer subject to mandatory amortisation.Practical implicationsThe results are consistent with accounting opportunism and suggest “overpayment” and accounting flexibility having an economic consequence. This would be expected to result in asset impairments in subsequent periods; however, there is little evidence of this occurring.Social implicationsThese results have relevance for regulators concerned with the operation of regulation relating to business acquisitions (AASB 3) and intangible assets (AASB 138).Originality/valueThis paper complements a number of papers concerned with the recognition of IIAs in business combinations and confirms what many researchers in the area typically assume (triangulation).

Evolution of intangible asset accounting: Evidence from Australia

This study investigates how the adoption of IFRS in Australia has changed the accounting for goodwill and identifiable intangible assets (IIA). Based on unique hand‐collected data for 802 Australian firm‐years during 2000–2010, we find that expenses related to IIA are higher under IFRS, which is consistent with the view that IFRS accounting policies for IIA are stricter than those under Australian domestic accounting standards pre‐2005 (AGAAP). Our results show two effects that accompany higher IIA expenses under IFRS, which reduce a negative impact on earnings: (i) lower goodwill expenses, and (ii) a shift in recognition of IIA from those with finite useful life to IIA with indefinite useful life. Finally, our market value analyses suggest that the market does not treat mechanical goodwill amortization as a genuine expense, but does treat as genuine expenses discretionary impairment charges, and more lenient IIA amortization under AGAAP. Our results are in line with prior Australian studies claiming that imposing stricter accounting rules for intangible assets under IFRS tends to diminish the quality of investors' information set.

Regime change in the accounting for goodwill

PurposeThis study aims to examine the impact of the recent regime change in accounting for goodwill, from the systematic periodic amortisation to the impairment testing, on the frequency and the extent of goodwill write-offs in the context of Australia. It also examines the impact of the change from the amortisation approach to the impairment approach on the value relevance of older goodwill.Design/methodology/approachThe authors approach the first research question by comparing the actual amount of goodwill impairment charge by the sample firms with the minimum “as if” amortisation charge that would have been required under the amortisation regime. The authors approach the second question using a modified Ohlson model (1995), similar to Bugeja and Gallery (2006). The sample consists of 911 firm-year observations with the number of observations in the particular year being 238, 242, 220 and 211 in 2009, 2008, 2007 and 2006, respectively.FindingsThe findings suggest that the adoption of the impairment approach has decreased the frequency and the amount of goodwill write-off. The goodwill impairment amount is substantially less than the “as if” amortisation amount that would have been required under the amortisation regime. The results also suggest that older goodwill is now value-relevant, whereas goodwill purchased during the current year is not value-relevant. One reason for this may be that AASB 3: Business Combination allows for the provisional allocation of the purchase price to goodwill to be allocated to other identifiable intangible assets latter on. Hence, during the year of business combination, investors do not form a firm view of the amount of goodwill arising out of the business combination.Research limitations/implicationsThis study uses data for the first four years since the inception of the impairment approach.Practical implicationsThe findings of this study have important implications for the fair value accounting debate. The discretions allowed the managers under the impairment approach to improve the information content of goodwill. The relatively low levels of goodwill impairment even during the 2008-2009 global financial crisis contradict to the apprehensions found in the literature that managers will use the goodwill write-off as a tool for downward earnings management. The findings also imply that if managers are allowed with adequate flexibility through accounting standards rather than stipulating some systematic and mechanistic rules, the information value of the accounting measurement may improve.Social implicationsThe findings feed into the debate of “rule-based” versus “principle-based” accounting standards and favours the “principle-based” accounting standards. The findings also contribute to the accounting measurement literature by concluding that if allowed with discretionary choices, managers may not always opt for the conservative accounting measurements (such as, recording goodwill write-offs).Originality/valueAdopting an alternative approach, this study shows that the fair value accounting for goodwill has resulted in an optimistic approach to goodwill write-offs. It has also improved the information content of reported goodwill. This is the first known study addressing the research questions in consideration after the adoption of the goodwill impairment approach.

Intangibles and methods for their valuation in financial terms: Literature review

Purpose: The purpose of this paper is to review literature devoted to intangibles and their valuation and give examples of the methods that can be used for valuation of individual intangibles in financial terms.Design/methodology/approach: Paper presents a systematic review of articles dedicated to intangibles and their valuation.Findings: This review shows that there is a need for consensus in definitions of intangibles, intangible assets, knowledge assets and other related terms. These terms are used interchangeably in spite of their different meanings. Many methods for valuation of intangibles can be found in the literature, but widely accepted list of basic intangibles with suggested methods for their valuation in financial terms is still missing.Research limitations/implications: Not all the papers related to this topic could be covered in this paper. Presented list of important intangible components may be enhanced and examples of some other methods for their valuation may be added in the future.Practical implications: Paper calls for development of framework comprising list of the most important intangibles, proposals of methods used for their valuation and examples of their use. This framework can be helpful for organization, which are confronted with a difficult task of intangibles valuation.Originality/value: Basic definitions and differences between intangibles, intangible assets, identifiable intangible assets, knowledge assets and intellectual capital have not been mentioned in one paper yet. List of intangibles and methods for their valuation gives a direction for future work that can be fruitful for valuation of intangibles.

Accounting Discretion and Purchase Price Allocation After Acquisitions

The recent movement in standards setting toward fair-value-based accounting beyond financial assets and liabilities calls for more empirical evidence on fair-value measurement, especially that of intangible assets. This article studies the initial valuation of goodwill and identifiable intangible assets after acquisitions. We find that the allocation of purchase price to goodwill and identifiable intangible assets is related to the economic determinants of the valuation. However, it is also significantly affected by managerial incentives arising from the differential treatments of goodwill and identifiable intangible assets under Statement of Financial Accounting Standards (SFAS) 142. The same managerial discretions are not exhibited in the purchase price allocation prior to SFAS 142, when goodwill and other intangibles are both amortized. These findings suggest that unverifiable fair value measures are associated with the underlying economics but also deviate from the true values in the presence of management reporting incentives. Further analysis suggests that external appraisers constrain managerial discretion in intangible asset valuation to an extent but do not completely eliminate it.

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.