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

Abstract

Motivated by investor criticisms of current accounting for business combinations, this study investigates whether differences exist in how acquisition date fair values of 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 of intangibles only when they are strategically important sources of future cash flows. Still other investors prefer separate of recognition of identifiable intangibles that are separable from the business, have defined useful lives, and have identifiable revenue streams. Our primary findings suggest that separate recognition of strategically important intangibles is value relevant, and that there is no loss of value relevant information if other (non-strategic) intangibles are subsumed in goodwill. Consistent with some investor views, we also find cross-sectional variation in value relevance based on differences in underlying asset characteristics.

Keywords: mergers and acquisitions, intangible assets, purchase price allocations, fair value

JEL Classification: D82, G34, M41