Differences in the Value Relevance of Identifiable Intangible Assets

Abstract

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

Keywords: mergers and acquisitions, intangible assets, purchase price allocations, goodwill

JEL Classification: D82, G34, M41