Acquirers’ financial reporting preferences and accounting for intangibles in acquisitions

25 Pages Posted: 28 Oct 2019 Last revised: 3 Feb 2021

See all articles by Lisa Koonce

Lisa Koonce

University of Texas

Sara Toynbee

University of Texas at Austin

Brian J. White

University of Texas at Austin - Department of Accounting

Date Written: February 1, 2021

Abstract

We test whether an impending change in the accounting for goodwill mitigates bias in the initial values that acquirers assign to intangible assets. Results of two experiments with experienced professional participants suggest that the new accounting alters, but does not eliminate, bias in acquisition-date fair values. Specifically, we provide the new insight that acquirers have a preference to minimize the value of recognized goodwill when the initial fair values assigned to intangibles do not affect future earnings, as under the planned accounting change. Further, this preference regarding the composition of the balance sheet appears to be specific to goodwill. Our research also complements previous archival evidence by providing causal evidence that acquirers are more likely to bias initial fair values when there is significant uncertainty in their private information about asset value. In contrast, a low level of uncertainty “psychologically ties acquirers’ hands” such that they do not bias their fair value estimates. Our theory and results provide important input to standard setters and practitioners regarding an unanticipated consequence of the impending change in accounting for intangible assets.

Keywords: intangible assets, business combinations, goodwill, elastic justification

JEL Classification: D81, M41

Suggested Citation

Koonce, Lisa L. and Toynbee, Sara and White, Brian J., Acquirers’ financial reporting preferences and accounting for intangibles in acquisitions (February 1, 2021). Available at SSRN: https://ssrn.com/abstract=3465719 or http://dx.doi.org/10.2139/ssrn.3465719

Lisa L. Koonce (Contact Author)

University of Texas ( email )

Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)

Sara Toynbee

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Brian J. White

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

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