Accounting Discretion and Purchase Price Allocation After Acquisitions

58 Pages Posted: 15 Sep 2006

See all articles by Ivy Zhang

Ivy Zhang

University of California, Riverside

Yong Zhang

Hong Kong Polytechnic University

Date Written: May 29, 2007


This study investigates acquirers' allocation of purchase price between goodwill and identifiable intangible assets upon the completion of acquisitions. SFAS 142 replaces goodwill amortization with periodic impairment tests based on fair value estimates, while most identifiable intangible assets are still amortized over finite useful lives. As a result of the new differential accounting treatment, we predict and find that managers allocate more purchase price to goodwill post SFAS 142 to reduce amortization expenses when they anticipate greater discretion in future goodwill assessment to avoid reporting impairment. We also find that older CEOs who likely care more about short-term accounting earnings and bonus record more goodwill to avoid amortization expenses. The results are robust to controls for the economic determinants of the allocation. The explanatory power of acquirer/CEO characteristics that capture managers' reporting incentives is greater than that of the economic determinants. In contrast, the same variables cannot explain the purchase price allocation prior to SFAS 142. The findings suggest that unverifiable accounting measures likely deviate from the underlying economics as a result of management exploiting their accounting discretion. We also explore the role of external appraisers in the post SFAS 142 period and find mixed results.

Keywords: SFAS 142, Goodwill, intangible valuation, accounting discretion, fair value accounting

JEL Classification: M41, M43, M44, G24, G34

Suggested Citation

Zhang, Ivy and Zhang, Yong, Accounting Discretion and Purchase Price Allocation After Acquisitions (May 29, 2007). AAA 2007 Financial Accounting & Reporting Section (FARS) Meeting Paper, HKUST Business School Research Paper No. 07-04, Available at SSRN: or

Ivy Zhang (Contact Author)

University of California, Riverside ( email )

900 University Ave
Riverside, CA 92521
United States

Yong Zhang

Hong Kong Polytechnic University ( email )

Hung Hom
Hung Hom
Kowloon, AK HK HK
Hong Kong

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics