The Justifiability of Financial Reporting Preferences in Accounting for Intangibles in Business Combinations
38 Pages Posted: 28 Oct 2019
Date Written: October 4, 2019
Intangible assets are often recognized as part of a business combination in which acquirers estimate fair value based on uncertain inputs. In this paper, we test the idea that uncertainty in acquirers’ private information about the fair value of intangible assets causes them to make decisions based on their own financial reporting preferences. Results from two experiments with experienced accounting professionals as participants show that high uncertainty in acquirers’ private information causes them to consider financial reporting outcomes in their acquisition-date fair value decisions. In contrast, participants do not consider financial reporting outcomes when they have low uncertainty in their private information, despite the fact that doing so would allow them to maximize their own personal utility without negative consequences. Further, we find that acquirers have preferences over both income statement outcomes (amortization expense and potential future impairment losses) and balance sheet outcomes (the amount of recognized goodwill) when valuing intangibles.
Keywords: intangible assets, business combinations, goodwill, elastic justification
JEL Classification: D81, M41
Suggested Citation: Suggested Citation