This paper evaluates the relation between amounts recognised as identifiable intangible assets in business combinations and acquisition premiums, in periods before and after transition to IFRS. In the pre-IFRS period there is evidence of firms recognising identifiable intangible assets in business combinations where high acquisition premiums are paid. This is consistent with opportunism in the recognition of identifiable intangible assets, and high acquisition premiums being an economic consequence of the relative latitude in accounting for identifiable intangible assets. This association of identifiable intangible assets with acquisition premiums ceased with transition to IFRS, notwithstanding the latitude that continues to be provided in accounting regulations for the recognition of identifiable intangible assets. However, the incentives for opportunism remain and an issue requiring address is whether alternative sources of accounting flexibility in relation to business combinations exist, such as goodwill which is no longer subject to mandatory amortisation.

Introduction

This paper evaluates the association of identifiable intangible assets (IIA’s) acquired and recognised in business combinations with acquisition premiums, and considers whether this relationship changed on transition to International Financial Reporting Standards (IFRS) in 2005.1 There is evidence that firms in Australia historically recognised IIA’s rather than goodwill in business combinations because this ameliorated the impact of the mandatory amortisation of goodwill on firm performance reported in subsequent periods (e.g. Wines and Ferguson, 1993). As a consequence, the recognition of IIA’s in business combinations is commonly labelled ‘opportunistic’. Consistent with this ‘opportunistic’ label, Su and Wells (2015) are unable to find evidence that amounts recognised as IIA’s in business combinations are associated with future performance. 2 This gives rise to the concern that an economic consequence of the relative latitude afforded to accounting for IIA’s is high acquisition premiums, which given the absence of a relation with future performance may indicate overpayment. Hence, the first objective of this paper is to evaluate whether there is evidence of an association between the recognition of IIA’s and acquisition premiums. With transition to IFRS in 2005, the requirement for mandatory amortisation of goodwill was removed and the opportunistic incentives to recognise IIA’s rather than goodwill diminished. Accordingly, the second objective of this paper is to evaluate if the association between IIA’s and acquisition premiums persists in periods after transition to IFRS. The first motivation for this paper is to determine if regulatory arbitrage in relation to accounting choices for business combinations contributes to high acquisition premiums, and potentially overpayment by acquiring firms. There is empirical evidence of firms overpaying in acquisitions for a range of reasons, including management hubris (Roll, 1986), management empire building (Jensen, 1986) and management needing to find new opportunities for growth after exhausting those available internally (McCardle and Viswanathan, 1994). Furthermore, there is evidence of firms ameliorating the impacts of business combinations on financial statements through accounting policy choices (Wines and Ferguson, 1993; Ayers et al., 2000). However, an issue requiring address is whether this contributes to high acquisition premiums and has economic consequences. Anecdotal evidence of IIA’s being associated with high acquisition premiums in business combinations, and potentially overpayment, is provided by firms such as ABC Learning Ltd (ABC). As a consequence of business combinations over the period 2000 to 2007 ABC recognised IIA’s (that were not amortised) of $2,622m, and goodwill (which was for most this period amortised) of only $269m. Any of the reasons identified above for overpayment, which would manifest in high acquisition premiums, could be considered relevant.