Fair Value Accounting, Earnings Management, and the Case of Bargain Purchase Gain
46 Pages Posted: 9 May 2018 Last revised: 31 May 2018
Date Written: April 6, 2018
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: Suggested Citation