Skip to main content
Disciplines
Automotive Business IT + Informatics Construction + Real Estate Electrical Engineering + Electronics Energy + Sustainability Insurance + Risk Finance + Banking Management + Leadership Marketing + Sales Mechanical Engineering + Materials
Events
DE
EN
Books
Journals
Topic Page
Marketing
Start single access now
Access for companies
EXTENDED SEARCH
Log in
Top
Review of Accounting Studies

23-11-2023

Differences in the value relevance of identifiable intangible assets

Authors: Zachary King, Thomas J. Linsmeier, Daniel D. Wangerin

Published in: Review of Accounting Studies

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

Motivated by investor criticisms of current accounting standards, this study investigates whether differences exist in how acquired identifiable intangible assets relate to investors’ expectations about the entity’s cash flow prospects. Some investors assert that all acquired intangibles should be subsumed within goodwill, while others prefer separate recognition of identifiable intangibles only when they are strategically important sources of future cash flows. Still other investors 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). Consistent with some investor views, we find cross-sectional variation in the value relevance of identifiable intangibles based on differences in underlying asset characteristics. Our primary findings suggest that strategically important and wasting intangibles provide information different from that provided by goodwill. These findings inform standard setters as they evaluate recognition and disclosure alternatives for identifiable intangible assets.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

inform now
Appendix
Available only for authorised users
Footnotes
1
For that asset class, we fail to find consistent evidence that coefficients differ from zero, which suggests expensing rather than capitalizing those intangibles.
 
2
For example, see Aboody and Lev (1998), Barth et al. (1998), Barth and Clinch (1998), Chalmers et al. (2011), Bauman and Shaw (2018), Kallapur and Kwan (2004), Kimbrough (2007), Sahut et al. (2011), Tsoligkas and Tsalavoutas (2011), and Wangerin (2019).
 
3
Investors’ dependence on information sources beyond accounting is increasing with the growing availability of timelier sources of forward-looking information. Still investors have noted that does not negate the value of accounting information if it confirms the information used to set security prices (Papa 2018). If investors use other timelier sources of information, then the confirmatory value of financial reporting information increases relative to predictive value. Investors also have reported that this confirmatory value enables them to have governance over other timelier sources of information by enabling assessments of its reliability and consistency across various management communication platforms both non-GAAP and GAAP (Papa 2018). Therefore it is not necessary for financial statement disclosures to have a direct causal effect on investors’ judgments (i.e., provide decision-relevant information) to conclude accounting information is relevant.
 
4
This research relies on extensive evidence in the accounting and finance literatures that equity markets efficiently impound publicly available information in prices. Prior research shows that, when potential market inefficiencies exist, any bias to parameter estimates in price-level regressions is not economically significant. Therefore those estimates support reliable inferences (Aboody et al. 2002; Barth 2007).
 
5
Prior research also operationalizes the value relevance of asset values in alternative ways, including studies that associate recognized asset values with future income (e.g., Aboody and Lev 1998) and operating cash flows (e.g., Deng and Lev 2006). However, it is important to recognize that there is significant heterogeneity in the pattern over which future cash flows and earnings arise from different types of intangible assets. For example, Clarke (1976) estimates the benefits to marketing-related intangibles (e.g., tradenames, brands, etc.) are realized between three and 15 months. In contrast, Healy et al. (2002) propose that a commercialized pharmaceutical can generate cash inflows while under patent for upwards of 10 years.
 
6
Failing to find differences between coefficients on certain types of intangibles and goodwill also could be due to a lack of statistical power.
 
7
According to the measurement guidance in SFAS 157 (FASB 2006; codified and currently active in ASC Topic 820), fair values for identifiable intangibles are generally Level 2 or Level 3 estimates because there are rarely identical assets traded in active markets. Most fair value estimates for intangible assets use Level 3 inputs, but there are certain cases where transactions involving similar (but not identical) assets are observable. In these cases, Level 2 inputs are most commonly available for internet domain names, FCC licenses, and carbon emission rights (AICPA 2012).
 
8
We use the term “outcome uncertainty” to be consistent with the IASB’s Conceptual Framework, which defines it as uncertainty arising from unknown amounts, timing, or both of future cash inflows and outflows from an asset or liability (IASB 2018). This differs from measurement uncertainty in the IASB’s Conceptual Framework, which is defined as arising when prices are unobservable in an active market and therefore must be estimated. However, to be consistent with how measurement uncertainty often is described in prior research, outcome uncertainty also could be viewed to be an additional dimension of measurement uncertainty.
 
9
Easton and Sommers (2003) show that biased coefficients in price-levels regressions can arise due to the effects of outliers concentrated among large firms. Therefore we also follow the recommendation of Easton and Sommers (2003) to use market capitalization as an alternative scalar in price-level regressions (untabulated). Regression diagnostic statistics indicate outliers are concentrated among the largest firms in our sample. This suggests that scaling by market capitalization (rather than shares outstanding) within our sample of acquirers also is not sufficient to produce unbiased coefficients.
 
10
Leone et al. (2019) recommend examining studentized residual and DFIT statistics to identify potentially influential observations in the data. Such an examination using equation (1) (described in the next section) identifies 65 potentially influential observations in our data with absolute studentized residuals greater than 2.0 and 93 potentially influential observations in our data with absolute DFIT statistics greater than 2*(p/n)1/2, where p is the number of parameters (24) and n is the number of observations (2,560). Robust regression helps ensure that our results are not driven by outliers.
 
11
We also validate our classification of wasting and organically replaced intangibles by regressing changes in future sales and future advertising expenses on these variables. We expect that both wasting and organically replaced intangibles will be associated with future sales but only organically replaced intangibles will be associated with future advertising expenses because only organically replaced intangibles require future expenditures to maintain or enhance their value. In untabulated validation tests, we find results that confirm our expectations.
 
12
To provide evidence on whether the recent financial crisis affects inferences, we re-ran our primary analyses on firm-years that Compustat assigns an FYEAR of 2010 or higher. Inferences are unchanged in this analysis (untabulated).
 
13
There are 633 firm-year observations reporting negative earnings in the acquisition year, which represents approximately 25% of our sample. Therefore we re-estimated our primary tests allowing the coefficient on earnings to vary for loss firms. Inferences are unchanged.
 
14
When using the industry-based (asset-type) classification, there are 708 (829) observations with no strategically important intangibles and 508 (496) observations with more than one strategically important intangible (untabulated).
 
15
We do not report adjusted R2 statistics because they are not meaningful goodness-of-fit measures in robust regressions (Leone et al. 2019). When estimating our models in weighted least squares using weights obtained from robust regressions, we obtain adjusted R2 statistics of 0.66 or better (untabulated).
 
16
We show, in Appendix 2, that the identifiable intangibles management discloses as strategic are the same as those identified by our measures, suggesting both approaches may consistently identify the same assets.
 
17
We omit industry fixed effects because our changes specifications examine first differences of all dependent and independent variables of interest. Therefore factors that do not vary over time, such as industry, are implicitly controlled for (Greene 2012, pp. 355–356; Wooldridge 2013, pp. 459–474).
 
18
We limit our analyses to the strategically important cross-section because our previous cross-sectional results indicate that nonstrategic organically replaced intangibles are not consistently associated with equity prices and, therefore not relevant to investors.
 
19
Prior to the release of the purchase price allocation disclosure, we expect that some investors may have formed expectations about the amounts allocated to intangibles based on other publicly available information. However, without some observable measure of such investor expectations, it is not possible to determine whether a particular recognized amount should have a positive or negative effect on signed returns over short windows surrounding the release of purchase price allocations.
 
Literature
Aboody, D., M.E. Barth, and R. Kasznik. 1999. Revaluations of fixed assets and future firm performance: Evidence from the UK. Journal of Accounting and Economics 26 (1-3): 149–178.CrossRef
Aboody, D., M.E. Barth, and R. Kasznik. 2004. SFAS no. 123 stock-based compensation expense and equity market values. The Accounting Review 79 (2): 251–275.CrossRef
Aboody, D., J. Hughes, and J. Liu. 2002. Measuring value relevance in a (possibly) inefficient market. Journal of Accounting Research 40 (4): 965–986.CrossRef
Aboody, D., and B. Lev. 1998. The value relevance of intangibles: The case of software capitalization. Journal of Accounting Research 36 (Supplement): 161–191.CrossRef
Barth, M.E. 2007. Research, standard setting, and global financial reporting. Foundations and Trends® in Accounting 1 (2): 71–165.CrossRef
Barth, M.E., W.H. Beaver, and W.R. Landsman. 2001. The relevance of the value relevance literature for financial accounting standard setting: Another view. Journal of Accounting and Economics 31 (1-3): 77–104.CrossRef
Barth, M.E., M.B. Clement, G. Foster, and R. Kasznik. 1998. Brand values and capital market valuation. Review of Accounting Studies 3 (1): 41–68.CrossRef
Barth, M.E., and G. Clinch. 1998. Revaluated financial, tangible, and intangible assets: Associations with share prices and non-market-based value estimates. Journal of Accounting Research, Supplement 36: 199–233.
Barth, M.E., and G. Clinch. 2009. Scale effects in capital markets-based accounting research. Journal of Business Finance and Accounting 36 (3-4): 253–288.CrossRef
Bauman, M.P., and K.W. Shaw. 2018. Value relevance of customer-related intangible assets. Research in Accounting Regulation 30 (2): 95–102.CrossRef
Blankespoor, E., E. deHaan, and I. Marinovic. 2020. Disclosure processing costs, investors’ information choice, and equity market outcomes: A review. Journal of Accounting and Economics 70 (2-3): 1–46.CrossRef
Campbell, J.L., K.H. Gee, and Z. Wiebe. 2022. The determinants and informativeness of non-GAAP revenue disclosures. The Accounting Review 97 (7): 23–48.CrossRef
Carnes, R.R., D.M. Christensen, and P.T. Lamoreaux. 2018. Investor demand for internal control audits of large U.S. companies: Evidence from a regulatory exemption for M&A transactions. The Accounting Review 94 (1): 71–99.CrossRef
Carroll, T.J., T.J. Linsmeier, and K.R. Petroni. 2003. The reliability of fair value versus historical cost information: Evidence from closed-end mutual funds. Journal of Accounting, Auditing and Finance 18 (1): 1–23.CrossRef
Chalmers, K., G. Clinch, and J.M. Godfrey. 2011. Changes in value relevance of accounting information upon IFRS adoption: Evidence from Australia. Australian Journal of Management 36 (2): 151–173.CrossRef
Clarke, D.G. 1976. Econometric measurement of the duration of advertising effect on sales. Journal of Marketing Research 13 (4): 345–357.CrossRef
Crane, M., and R.A. Dyson. 2009. Risks in applying the new business combination guidance to intangible assets. The CPA Journal 79 (1): 50–58.
Deng, Z., and B. Lev. 2006. In-process R&D: To capitalize or expense? Journal of Engineering and Technology Management 23 (1-2): 18–32.CrossRef
Easton, P.D., and G.A. Sommers. 2003. Scale and the scale effect in market-based accounting research. Journal of Business Finance and Accounting 30 (1-2): 25–56.CrossRef
FASB. 2001b. Business Combinations. Statement of Financial Accounting Standards No. 141: As amended. Norwalk, Connecticut.
FASB. 2001a. Goodwill and Other Intangible Assets. Statement of Financial Accounting Standards No. 142: As amended. Norwalk, Connecticut.
FASB. 2006. Fair Value Measurements. Statement of Financial Accounting Standards No. 157: As amended. Norwalk, Connecticut.
FASB. 2007. Business Combinations. Statement of Financial Accounting Standards No. 141 (revised 2007): As amended. Norwalk, Connecticut.
FASB. 2018. Conceptual Framework for Financial Reporting: Chapter 3, Qualitative Characteristics of Useful Financial Information. Statement of Financial Accounting Concepts No. 8: As amended. Norwalk, Connecticut.
FASB. 2019. Identifiable Intangible Assets and Subsequent Accounting for Goodwill. FASB Invitation to Comment.
FASB. 2021. Conceptual Framework for Financial Reporting: Chapter 4, Elements of Financial Statements. Statement of Financial Accounting Concepts No. 8: As amended. Norwalk, Connecticut.
Gonedes, N.J., and N. Dopuch. 1974. Capital market equilibrium, information production, and selecting accounting techniques: Theoretical framework and review of empirical work. Journal of Accounting Research 12: 48–129.CrossRef
Greene, W.H. 2012. Econometric Analysis. Seventh ed. Prentice Hall.
Healy, P.M., S.C. Myers, and C.D. Howe. 2002. R&D accounting and the tradeoff between relevance and objectivity. Journal of Accounting Research 40 (3): 677–710.CrossRef
Henning, S.L., B.L. Lewis, and W.H. Shaw. 2000. Valuation of the components of purchased goodwill. Journal of Accounting Research 38 (2): 375–386.CrossRef
IASB. 2008. Business combinations. International Financial Reporting Standard No. 3. London, United Kingdom.
International Accounting Standards Board (IASB). 2004. Intangible Assets. In International Accounting Standards 38: As amended. United Kingdom.
IASB. 2018. Conceptual Framework for Financial Reporting. United Kingdom.
IASB. 2020. Business Combinations—Disclosures, Goodwill and Impairment. IFRS Standards Discussion Paper. London, United Kingdom.
Jennings, R., J. Robinson, R.B. Thompson II, and L. Duvall. 1996. The relation between accounting goodwill numbers and equity values. Journal of Business Finance and Accounting 23 (4): 513–533.CrossRef
Johnson, L.T., and K.R. Petrone. 1998. Is goodwill an asset? Accounting Horizons 12 (3): 293–303.
Kallapur, S., and S.Y.S. Kwan. 2004. The value relevance and reliability of brand assets recognized by U.K. firms. The Accounting Review 79 (1): 151–172.CrossRef
Kimbrough, M.D. 2007. The influences of financial statement recognition and analyst coverage on the market’s valuation of R&D capital. The Accounting Review 82 (5): 1195–1225.CrossRef
Kravet, T.D., S.E. McVay, and D.P. Weber. 2018. Costs and benefits of internal control audits: Evidence from M&A transactions. Review of Accounting Studies 23 (4): 1389–1423.CrossRef
Lambert, R., C. Leuz, and R.E. Verrecchia. 2007. Accounting information, disclosure, and the cost of capital. Journal of Accounting Research 45 (2): 385–420.CrossRef
Lawrence, A., S. Siriviriyakul, and R.G. Sloan. 2015. Who’s the Fairest of Them All? Evidence from Closed-End Funds. The Accounting Review 91 (1): 207–227.CrossRef
Leone, A.J., M. Minutti-Meza, and C.E. Wasley. 2019. Influential observations and inference in accounting research. The Accounting Review 94 (6): 337–364.CrossRef
Lynch, D., M. Romney, B. Stomberg, and D. Wangerin. 2019. Tradeoffs between tax and financial reporting benefits: Evidence from purchase price allocations in taxable acquisitions. Contemporary Accounting Research 36 (3): 1223–1262.CrossRef
Ohlson, J.A. 1995. Earnings, book values, and dividends in equity valuation. Contemporary Accounting Research 11 (2): 661–687.CrossRef
Paugam, L., P. Astolfi, and O. Ramond. 2015. Accounting for business combinations: Do purchase price allocations matter? Journal of Accounting and Public Policy 34 (4): 362–391.CrossRef
Sahut, J., S. Boulerne, and F. Teulon. 2011. Do IFRS provide better information about intangibles in Europe? Review of Accounting and Finance 10 (3): 267–290.CrossRef
Shalev, R., I.X. Zhang, and Y. Zhang. 2013. CEO compensation and fair value accounting: Evidence from purchase price allocation. Journal of Accounting Research 51 (4): 819–854.CrossRef
Tsoligkas, F., and I. Tsalavoutas. 2011. Value relevance of R&D in the UK after IFRS mandatory implementation. Applied Financial Economics 21 (13): 957–967.CrossRef
Wangerin, D. 2019. M&A due diligence, post-acquisition performance, and financial reporting for business combinations. Contemporary Accounting Research 36 (4): 2344–2378.CrossRef
Wooldridge, J. M. 2013. Introductory Econometrics: A Modern Approach, Fifth Edition. Mason, Ohio: South-Western.
Wyatt, A. 2008. What financial and non-financial information on intangibles is value-relevant? A review of the evidence. Accounting and Business Research 38 (3): 217–256.CrossRef
Metadata
Title
Differences in the value relevance of identifiable intangible assets
Authors
Zachary King
Thomas J. Linsmeier
Daniel D. Wangerin
Publication date
23-11-2023
Publisher
Springer US
Published in
Review of Accounting Studies
Print ISSN: 1380-6653
Electronic ISSN: 1573-7136
DOI
https://doi.org/10.1007/s11142-023-09810-8