Determinants of Purchase Price Allocation Decisions - Accounting for Goodwill In IFRS and US-GAAP Business Combinations

Abstract:     
The first convergence project of IASB and FASB created the widely equivalent international and U.S. accounting standards for business combinations IFRS 3 and SFAS 141. The purchase price must be allocated to identifiable assets acquired and liabilities assumed with the residual amount recognized as goodwill. This purchase price allocation requires the acquirer firm’s management to exercise judgment and to use their private information. We investigate whether the management opportunistically or efficiently uses the discretion to initially recognize goodwill. Our empirical study is based on hand-collected and archival data for a random sample of 149 IFRS and US-GAAP business combinations of European and U.S. acquirer firms completed between 2005 and 2008. We show that the classic motivations of accounting choice such as debt contracting and political visibility only marginally influence the recognition of goodwill. We find that discretion potentials related to future goodwill impairment testing are already taken into account when initially recognizing goodwill in business combinations. However, our results provide also evidence that the accounting for goodwill in business combinations is not only associated with managerial reporting opportunism but also reflects the target firm’s going concern and synergies resulting from the business combination.

Keywords: Accounting Choice, Business Combinations, Purchase Price Allocation, Goodwill, IFRS 3, SFAS 141

JEL Classification: M40, M41, D82, G34

working papers series