Fair Value Accounting, Earnings Management, and the Case of Bargain Purchase Gain

46 Pages Posted: 9 May 2018 Last revised: 31 May 2018

See all articles by Steven B. Lilien

Steven B. Lilien

City University of New York - Stan Ross Department of Accountancy

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Yan Yan

Fairleigh Dickinson University

Date Written: April 6, 2018

Abstract

The new accounting standard (FASB ASC 805) requires acquiring firms to estimate the fair value of net assets acquired and recognize the excess amount over purchase price as a bargain purchase gain, a component of current earnings. The flexibility in fair value measurement provides acquiring management with discretion to determine the amount of the bargain purchase gain, and thereby, inflate income. This paper investigates the association between bargain purchase gains booked by the acquirer and smoothing of acquirers’ earning performance across time. We find that bargain purchase gains, and in particular, the level-3 fair value estimates of intangible assets acquired, have consistently been used to smooth earnings but that such smoothing activities are not associated with long-term market returns.

Keywords: bargain purchase gain, ASC 805, fair value measurement, ASC 820, earnings management

JEL Classification: M40, M41

Suggested Citation

Lilien, Steven B. and Sarath, Bharat Sarrukai and Yan, Yan, Fair Value Accounting, Earnings Management, and the Case of Bargain Purchase Gain (April 6, 2018). Baruch College Zicklin School of Business Research Paper No. 2018-05-03. Available at SSRN: https://ssrn.com/abstract=3167597 or http://dx.doi.org/10.2139/ssrn.3167597

Steven B. Lilien

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3163 (Phone)
646-312-3161 (Fax)

Bharat Sarrukai Sarath

Rutgers, The State University of New Jersey - Accounting ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

Yan Yan (Contact Author)

Fairleigh Dickinson University ( email )

1000 River Rd
Teaneck, NJ 07666
United States

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