This study evaluates the potential indicators of tangible asset impairments (TAI) and their interaction with legal enforcement, using an international sample of 38 countries that follow International Financial Reporting Standards. Consistent with expectations, specific economic and opportunistic indicators demonstrate a significant relationship with TAI, and these are further affected by legal enforcement. In particular, empirical findings suggest that in weak enforcement countries, besides economic indicators, the opportunistic indicators of earnings smoothing and debt pressure are significantly related to TAI. In strong enforcement countries, the importance of economic indicators increases substantially, while the effect of the opportunistic debt-related indicator attenuates and the indicator of earnings smoothing is immaterial. This evidence suggests that legal enforcement constitutes a beneficial institutional attribute, but does not restrain all aspects of managerial opportunism.

1. Introduction

Asset impairments have been of particular interest to practitioners, regulators, and accounting researchers for decades. This is not surprising for several reasons. First, asset impairments often constitute material amounts in financial statements that signal managers’ perceptions about the future performance of assets.2 There is ample empirical evidence suggesting that investors incorporate this information into security prices (Bartov, Lindahl & Ricks, 1998). Second, asset impairments represent a formal manifestation of conditional conservatism (Ryan, 2006; André, Filip, & Paugam, 2015).3 Conditional conservatism is generally perceived as a salient attribute of accounting quality because it enhances stakeholders’ monitoring and facilitates efficient contracting (Watts, 2003). Finally, although there are clearly prescribed impairment guidelines in the sets of accounting standards that currently prevail, (i.e. United States Generally Accepted Accounting Principles [US GAAP] and International Financial Reporting Standards [IFRS]), evidence of flexibility in the magnitude and timing of asset impairments recognition still exists. For example, several studies find that asset impairments recognized under US GAAP are significantly related to opportunistic indicators (Hong, Paik, & Smith, 2018). Therefore, there is justifiable interest in examining the potential causes of asset impairments, and their interaction with other factors that affect the managers’ reporting behaviors.

1- Introduction

2- What determines investment in intangible assets?

3- Empirical analysis

4- Results

5- Conclusion

References

Abstract

In this paper, we look at the determinants of investment in intangible assets in Europe and explore whether their drivers and barriers are the same as for tangible assets. Our assessment suggests that tangible and intangible assets indeed appear to be affected somewhat differently by some of the tested key determinants. For instance, the regulatory framework seems to be more relevant for investment in intangibles while financial conditions, and in particular the availability of external funding, appear to be more relevant for tangible investment. Moreover, some evidence of complementarities between investments across different asset types suggests that a barrier to investment relevant for one asset type may indirectly impede investment in other assets too as there are synergies among different asset types, notably between tangible and intangible assets but also between different types of intangible assets.

Introduction

Since the onset of the global economic and financial crisis, the EU has been experiencing relatively low levels of investment. Despite signs of a moderate turnaround since 2014, the investment recovery remains fragile. Accordingly, across Europe, remarkable endeavours are being made to stimulate investment, notably to unlock drivers and to address barriers preventing investment from reaching a socio-economically optimal level (European Commission, 2018). To the extent that low investment is observed even among some of the most successful sectors and firms, it is difficult to argue that it is mainly driven by a constraint limiting capital accumulation. Instead, it appears that we either struggle to capture investment well – i.e. for some reason underestimate total investment – or faced with pertinent barriers holding back their investment decisions firms may have deliberately chosen a lower level of investment. Resolving these questions is important for policy making. In fact, if the explanation for an overall sluggish investment in Europe arises from a temporary phenomenon, for instance due to credit rationing in times of crisis, the policy implications would be quite differentthan in case of a systematic change in the capital allocation choices made by firms (Crouzet and Eberly, 2018). Zooming into investment figures per asset type reveals some interesting patterns (see Graph 1 ). While investment in tangible assets dropped during the financial crisis and remained flat thereafter (at least in the EU28), evidence points to a rapid expansion of investment in intangible assets.

1- Introduction

2- Theoretical background

3- Hypotheses development

4- Data and methods

5- Discussion

References

Abstract

Extending the dynamic resource accumulation framework to operations management, we propose that the stock of younger capital assets and flow of capital assets are positively associated with the value of intangible assets, an increasingly predominant basis of competitive advantage. Based on a sample of 1390 manufacturing firms representing 8255 firm-year observations, the stock of younger capital assets was positively related to the value of intangible assets, an association that was strengthened by higher inventory efficiency. However, we also found that the flow of capital assets is negatively related to the value of intangible assets, an association that is further exacerbated by high production efficiency. Our findings explain how operations management could play an important role in influencing the intangible asset value of manufacturing firms.

Introduction

Intangible assets are increasingly forming the basis of competitive advantage for a large number of firms (Bianchi, 2017; Haskel & Westlake, 2018). Because these assets have become a major portion of corporate assets in US and European firms, they have received considerable interest from scholars and policymakers (Shin, Kraemer, & Dedrick, 2017). According to Itami (1987), “invisible [intangible] assets are often the only real source of competitive edge that can be sustained over time” (page 1). Intangible assets refer to “…a particular technology, accumulated consumer information, brand name, reputation and corporate culture” (page 1). Despite this growing interest in understanding the drivers of intangible capital, the operations management literature has paid scant attention to explaining the vital role operations management can play in enhancing the value of intangible assets. To address this gap in our understanding of the nature and dynamics of capital assets in influencing the value of intangible assets, we draw on the classical dynamic resource accumulation framework by Dierickx and Cool (1989). They highlighted that managers must make decisions about expenditures (flow) to acquire assets in factor markets to accumulate (stock) non-tradable resources that lead to competitive advantage. The authors’ bathtub analogy focuses on investing and building assets over time, and illustrates that the flow of assets and accumulation of the stock of resources is a dynamic process: “[…] at any moment in time, the stock of water is indicated by the level of water in the tub; it is the cumulative result of flows of water into the tub (through the tap) and out of it (through a leak). In the example of R&D, the amount of water in the tub represents the stock of know-how at a particular point in time, whereas current R&D spending is represented by the water flowing in through the tap; the fact that know-how depreciates over time is represented by the flow of water leaking through the hole in the tub” (Dierickx & Cool, 1989, page 1506) Extending this metaphor to the critical, yet less explored, process of accumulating capital assets during the process of operations could increase a firm’s intangible asset value by maintaining the stock and flow of capital assets. Focusing on both stock and flow is necessary, because “while flows can be adjusted instantaneously, stocks cannot. It takes a consistent pattern of resource flows to accumulate a desired change in strategic asset stocks” (Dierickx & Cool, 1989, page 1506). Capital assets include machine, warehouse, and inventory capacities. The dynamic accumulation of capital stock provides firms with the necessary bandwidth to support operational activities that drive a firm’s intangible asset value. Current stock constitutes a combination of older and newer capital assets, whereas older capital assets help maintain continuity and interconnectedness with operational and non-operational capabilities.

INTRODUCTION

There is multiplicity as well as ambiguity in the identification of Intangible Assets. Grojer and Johanson (1999) and Guthrie & Petty (2000) termed these as “Soft” assets and “Weightless Wealth”. Fincham and Roslender (2003) and Lev (2001) called these as “Intellectual capital” and “Knowledge assets”. Andersen (1992) describes intangible assets as non-physical in nature, capable of producing future economic net benefits. Edvinsson & Malone (1997) calls these as “hidden capabilities” of an organization. Brooking (1997) describes them as the “combination of market based intangible assets, intellectual property, human-centered and infrastructure that enables the company to function”. Strassmann (1999) defines intangible assets as the difference between the market value of a company and the book value of its tangible assets. By whatever name the Intangible Assets are called; these assets for sure have gained high prominence in the operations of companies especially in the contemporary decade. Investment in Intangible Assets helps the companies to be innovatory (OECD, 2008) and hence vie their competitors (Canibano et al., 1999; Boujelben and Fedhila, 2011). These are important components of a firm’s strategic planning and operations (Wheelen and Hunger, 2011). These assets enhance company’s market value (Mishra and Jhunjhunwala, 2009). These provide a firm with improved customer attainment and preservation (OECD, 2008). These help to build customer loyalty and strengthen the brand image of a company (OECD, 2008). Specifically mentioning the relevance of some of these assets, Goodwill is given due consideration at the time of mergers and acquisitions (PWC, 2014). A higher value is paid by a company with the expectation to take advantage of the existing technology, knowledge and name of an established reputed firm (Canibano et al. 1999; Gu and Lev, 2001; PWC, 2014). Investment in R&D helps in producing novel products (Pradhan, 2003). Patents, copyrights and trademarks lead to a superior performance by extending monopoly to the firms (Greenhalgh and Rogers, 2012). Authors like Hirschey and Weygandt (1985); Chauvin and Hirschey (1993); Bosworth and Rogers (1998); Andras and Srinivasan (2003); Lantz and Sahut (2005); Nagaoka (2006); Heiens et al. (2007); Ehie and Olibe (2010); Boujelben and Fedhila (2011) have shown that R&D intensity is positively associated with the firm performance. Similarly, Advertising and Customer Relationship Management (CRM), another category of Intangibles, are documented as generator of high profits for the companies. Advertised products are easily recallable and identifiable which minimizes the chances of confusion and boost sales (Sahay and Pillai, 2009). Studies as Hirschey and Weygandt (1985); Chauvin and Hirschey (1993); Sahay and Pillai (2009); Kundu et al. (2010); Boujelben and Fedhila (2011) found a positive relation of advertising intensity with firm performance. Last but not the least; human asset these days is regarded as the most vital animate Intangible Asset. It forms intellectual capital of companies that helps in earning high profits through their skills and abilities (Arrighetti et al., 2014). Findings of Pew Tan et al (2007); Kamath (2008); Wang (2008); Ghosh and Mondal (2009); Clarke et al (2011); Wang (2011); Pal and Soriya (2012); Mondal and Ghosh (2012) confirm that Intellectual Capital enhances the firm performance.

1- Introduction

2- Background and method

3- Value relevance of goodwill, impairment, and disclosure

4- Determinants associated with goodwill recognition, impairment, and disclosure

5- Conclusions

References

Abstract

We review 42 studies from 2008 to early 2017 about IFRS goodwill accounting choices for recognition, impairment, and disclosure of goodwill, focusing on cross-country evidence of implementation effects. We develop a model of application of goodwill accounting based on IFRS 3, IAS 36, and country- and firm-level influences to analyze the research and to summarize existing evidence about goodwill accounting choices. We report evidence in support of IFRS accounting for goodwill recognition, impairment, and disclosure from many countries. However, evidence regarding value relevance is mixed. Overall, there is a lack of cross-country evidence regarding factors affecting goodwill accounting. Many studies show goodwill recognition, impairment, and disclosure are associated with economic and firm factors, and there is some evidence about the impact of managerial incentives and a lack of timeliness in impairment recognition. There is scope for more cross-country studies showing how institutional factors affect the application of IFRS 3 and IAS 36.

Introduction

The aim of our paper is to provide a synthesis of existing literature to identify where research provides strong evidence on the topic of accounting for goodwill after implementation of International Financial Reporting Standards (IFRS) in various countries. We develop and use a framework of accounting choice to analyze recent research on the effects of application of IFRS 3 Business Combinations and IAS 36 Impairment to find evidence as well as research opportunities for the following questions: Are goodwill accounting choices value relevant? This is a necessary condition for the next set of questions: What determinants influence goodwill accounting choices? What are the consequences of different goodwill accounting choices? To what extent are those determinants and consequences explained by country differences? We propose that strong evidence is provided when studies which are based on appropriate samples and methods provide consistent results across countries and over time. The focus of our paper is, initially, crosscountry studies because we seek evidence about the application of IFRS in a range of countries. To supplement this analysis (and because there are few cross-country studies) we also consider evidence from single-country studies. Accounting for goodwill is important and controversial. Recognized goodwill often represents the single largest item on a firm’s balance sheet (Boennen & Glaum, 2014). Accounting for business combinations has changed dramatically with the release by the US Financial Accounting Standards Board (FASB) of Statement of Financial Accounting Standards (SFAS) 141 Business Combinations and SFAS 142 Goodwill and Other Intangible Assets in June 2001 (FASB, 2001a, 2001b).1 Similar requirements were introduced in IFRS 3, which applied beginning in January 2005 for European Union listed companies’ consolidated accounts and in other countries that subsequently adopted IFRS, including Australia, Canada, and Malaysia (IASB, 2015). Notable aspects of IFRS 3 were abolishing the pooling of interests method and goodwill amortization as well as adopting an impairment-onlyapproach for goodwill and some other intangible assets. IAS 36, adopted from 2005, applies to impairment recognition, measurement and disclosure.

Despite the growing interest, Open Innovation (OI) in Intangible Assets (IAs) research is still fragmented and displays a limited contextual focus. This paper aims to provide a clearer view of these issues and represents a first step toward filling such research gap. A systematic literature review and a synthesis of highquality contributions with a focus on a general overview of research on OI and IAs in OI processes have been carried out. By critically evaluating the current body of literature and definitions, we have moved a step further toward comprehending the multiple facets of existing research and highlight several promising areas for future development. In particular, we have analyzed the role of IAs in OI practices by selecting a synthesis and a critical review of their different exploitations. We have combined multiple algorithms to produce a clear topical taxonomy of the multiple strands of research lying at the interface of OI and IAs.

Introduction

The topics of Intangible Assets (IA) and Open Innovation (OI) represent research themes among the most fertile in the last 30 years. Although they have developed almost independently of one another, a common conceptual theme has deeply interconnected their evolution: knowledge, in all its different definitions and interpretations. Interest in intangible assets (IAs) has casually arisen since the beginning of the past century (Veblen, 1908). But, only in the mid-twentieth century researchers’ attention was attracted by the work of Polanyi (1958) on tacit knowledge, which kept inside the seed of the future evolution of intangible assets. At the end of the twentieth century, Nonaka and Takeuchi (1995) presented their highly influential work on ‘‘the knowledge creating company’’ and paved the way for the formulation of tangible/intangible asset principles. Throughout the past 20 years, a wide array of studies by several authors dealt with the concept of non-physical assets, which proved to sustain the competitive advantage of firms. The role of IAs, therefore, has assumed an even more considerable relevance that has led to an increasing rate of publications in academic journals. As often happens in the evolution of a discipline, a sudden exploit of interest, which is deemed to be caused by a revolutionary cultural acquisition, is, in reality, a consequence of an evolution. This has been the case of Open Innovation (OI) as far as the innovation management field is concerned. Indeed, Dahlander and Gann (2010), in their extensive literature review, put into evidence that, sometime before Gann and Chesbrough burst with their work (2003) into the scientific literature on innovation, many authors had formulated concepts and questions related to OI, as absorptive capacity (Cohen and Levinthal, 1990), how to obtain economic returns from innovation (Teece, 1986), the opposition between exploration versus exploitation (March, 1991). In particular, Mowery (2009) affirms that in the late 19th and early 20th centuries, ‘‘many of the elements of the ‘‘Open Innovation’’ approach to R&D management [were] visible’’ and that closed innovation activities were even less in number than open innovation ones. Unquestionably, as further explained in the definition given by Chesbrough et al (2006), the role of OI paradigm for its capability of fostering technological projects from internal or external origins to market can be considered fundamental to business structures. Actually, an increasing number of firms have recognized the benefit of external knowledge to support their innovation activities (Chen et al, 2015).

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.

1- Introduction

2- Research design

3- Empirical results

4- Robustness checks

5- Concluding remarks

References

Abstract

Extant literature suggests that corporate social responsibility (CSR) accrues social capitals that buffers business risk. We extend this literature by documenting that firms with higher prior history of positive CSR engagement are less likely to file for bankruptcy when they are in deep financial distress and are more likely to experience accelerated recovery from distress. Furthermore, we decompose social capitals accrued from prior CSR engagement into moral capital and exchange capital. The results show that moral capital reduces bankruptcy likelihood when the firm grows larger. On the other hand, exchange capital mitigates bankruptcy likelihood when the firm relies on intangible assets to operate and when firms operates in more litigious business environment.

Introduction

This study aims to evaluate the value of corporate social responsibility (CSR, henceforth) in the context of corporate financial distress. At the crux of the study is a simple question: whether and how the bankruptcy likelihood of financially distressed firms can be reduced by their CSR engagement? CSR engagement is increasingly perceived as a risk management instrument that not only reduces cash flow volatility but also helps avoid costly lower-tail outcomes (Earnst & Young, 2017; Minor & Morgan, 2011; Peloza, 2006; Perez-Batres, Doh, Miller, & Pisani, 2012). Godfrey (2005) theorize that a firm’s prior CSR engagement provides an insurance-like protection when the firm is in crisis. For instance, firms with proactive CSR engagement in managerial practices like environmental assessment and stakeholder management (Wood, 1991) tend to anticipate and reduce potential sources of business risk, such as potential governmental regulation, labor unrest, or environmental damage (Orlitzky & Benjamin, 2001).1 We extend Godfrey (2005) by looking for evidence on the relationship between prior CSR engagement and bankruptcy likelihood. The empirical investigation is conducted based on a sample of financially distressed firms. Our research question is partly motivated by Smith and Stulz (1985), who postulate that value-maximizing corporations rationally acquire risk management instruments when the corporations expect future financial distress. This is because risk management instruments are most valuable to the corporations when the expected financial distress cost becomes so onerous that bankruptcy becomes imminent. As CSR engagement can be used as a form of risk management instrument, we expect that the prior CSR engagement can mitigate the expected distress cost and, consequently, lowers the bankruptcy likelihood.

1. Introduction

2. Analyze of the annual gross income in a few countries of Union European

3. Research

4. Conclusion

Acknowledgements

References

The importance of intangible cultural heritage refer to the wealth of knowledge and skills that is transmitted from one generation to the next ones. First of all, for the minority groups and for mainstream social groups, the social and economic value of knowledge is relevant. Intangible cultural heritage is expressed through process, phrases, know-how, and abilities- that include associated objects and cultural spaces – that people distinguish as component of their cultural heritage. Spread through generations and constantly recreated, it ensures humanity with a sense of identity and continuity. Secondly, different sectors of the economy, for instance: rates of growth and development, the volumes of outflow of foreign exchange, infrastructure development, new management techniques and the training experience are certainly contributing to the economic and social development of a country. Safeguarding intangible cultural heritage is a valuable source of the economy. Safeguarding activities must therefore always involve the society, people and, where appropriate, individuals that bear such heritage. The global wealth of traditions is the principal motivation for travel, with tourists seeking to find out about new cultures and to experience the global difference of performing arts, handcrafts, rituals and cuisines. The cultural cooperation stimulates by such meeting prompts discussion, builds understanding and encourage tolerance and peace. Persons who realize these values, everywhere in the world have their own way for spreading their knowledge and skills, for the most of the times relies on word of mouth rather than written texts. In conclusion, the intangible cultural heritages create bridges between past, present and future; they make continuity and change the structure of the society with experiences like transition and transcendence.

Introduction

In Europe, tourism is take in account as one of the sectors with the best growth prospects, that has positive effects on the number of new working places. The influx of tourists and visitors in different regions is, also, determined by the attractiveness, value, quantity and quality of tourist attractions in these areas, and the level of knowledge and presentation. Tourism is a vital source of income and employment, it is fundamental for many parts of Europe and for some of them even indispensable, since it is an important factor to improve competitiveness. European Union gives rightful importance to tourism, which contributes substantially to its economic and social objectives. European tourism faces many challenges: global economic crisis, increasing competition with other destinations, the consequences of climate changes or its seasonal nature. On the one hand, the industry must adapt to social developments that will influence demand in the tourism sector, on the other hand, it has to face the constraints of the current structure of the sector, its specific characteristics, as well as its economic and social context according to Nicula, Spanu and Neagu (2013). Authors Tri Anggraini, Sadasivam, Alpana (2015) consider that the heritage offers identity to a country, and also culture sustain development. In this domain if you have possibilities to bring back to live the potential of the regions that can give unique products in the tourist market and complementary activities, that have the role to increase employment, with positive externalities on quality of life. Heritage is one of the important components which has the role to create character, identity and image of city.

This study examines the impact of changes in accounting standards on the accounting for goodwill and identifiable intangible assets (IIA) by Australian companies. Australia adopted International Financial Reporting Standards (IFRS) from 2005. Prior to 2005, under Australian domestic accounting standards (AGAAP)1 , purchased goodwill had to be capitalized and amortized using the straight-line method over a period not exceeding 20 years, while IIA were largely unregulated. Under IFRS, all purchased intangibles must be capitalized as assets, but most internally developed IIA must not be. Subsequently, goodwill and IIA with indefinite useful life are subject to annual impairment testing, and finite life IIA are amortized and tested annually for impairment. While the transition to IFRS in 2005 required managers to derecognize some capitalized internally developed IIA, they were also required to separately recognize IIA previously included in purchased goodwill. Reinstatement of goodwill and purchased IIA previously written off was also permitted. We examine how this transition changed the way Australian companies account for their goodwill and IIA. Both AGAAP and IFRS standards on goodwill and IIA contained scope for management discretion in measurement and classification. By their nature, intangible assets create discretion due to the often-unverifiable nature of estimates needed in their valuation (Ramanna & Watts, 2012). Consistent with positive accounting theory (Watts & Zimmerman, 1986), we assume that managers value that discretion, because it allows them to opportunistically manage earnings and balance sheet numbers to meet earnings, compensation, and debt-covenant compliance targets. The way in which managers can exercise this discretion changed when Australia adopted IFRS. Under AGAAP, there was relatively little discretion in accounting for goodwill subsequent to its recognition, due to the systematic amortization regime required. On the one hand, there was much discretion in accounting for IIA, given the comparatively small amount of regulation of IIA in AGAAP. Under IFRS, there is now more discretion in accounting for goodwill stemming from IFRS’ “impairment-only” approach, due to the unverifiable nature of valuations in the impairment test (Hamberg & Beisland, 2014; Ramanna & Watts, 2012). On the other hand, IFRS prescribes specific accounting methods to measure IIA subsequent to initial recognition: impairment for indefinite life IIA and a dual approach including amortization plus impairment for finite IIA. Compared to the previous rather unregulated Australian environment for IIA, these amortization and impairment rules are perceived as more stringent. However, companies still have some discretion in deciding whether an IIA has a finite life or an indefinite life. We therefore propose that under IFRS, there will be a tendency for Australian companies to recognize greater portions of indefinite life IIA relative to finite life IIA on their balance sheets. This is in line with the argument that managers are likely to exploit the discretion afforded by the impairment-only approach applicable to indefinite life IIA rather than the systematic amortization required for finite IIA (Hamberg & Beisland, 2014; Li & Sloan, 2017). Based on the same argument, we propose that companies are more likely to report lower expenses related to goodwill under IFRS compared to AGAAP. To the extent that managers can also use their discretion for signaling purposes, we finally propose that while a mechanical amortization (goodwill amortization under AGAAP and IIA amortization under IFRS) is not relevant for market valuation, the market perceives discretionary charges as value relevant (impairments under AGAAP and IFRS as well as IIA amortization under AGAAP).

The Sharīʿah requirements regarding the transferability of intangible assets include a clear transfer of title and the need for the asset to adhere to Sharīʿah-compliance requirements, which include avoidance of gharar (uncertainty), maysir (gambling) and concealing knowledge. The avoidance of ghararis twofold: parties must know exactly what the product is as well as its precise value. However, Khattak et al. (2015) found that there is a lack of clarity with regards to rights and remedies associated with intangibles in some Islamic jurisdictions. Bouheraoua et al. (2013) have also found important Sharīʿah issues related to intangible assets such as gharar fā
hish (excessive uncertainty) in the identification and determination of the intangible assets due to their non-physical attributes and the probabilistic nature of their future benefits. They have identified two Sharīʿah views on this issue. One view does not recognize probable future economic benefits until they actually exist, to ensure the protection of property and avoid disputes among the contracting parties. The other view recognizes probable future economic benefits when the probability of their existence is preponderant. The involvement of intangible assets in the structuring of Islamic financial products has raised emerging pertinent reporting issues of substance and form of the financial transactions. The financial reporting issues present in the accounting of intangible assets require specific accounting policies and treatment that consider Sharīʿah requirements on permissible, measurable, separable and tradable dimensions. This study intends to explore the reporting dimensions of intangible assets in accordance with International Financial Reporting Standards (IFRS) and the relevant Sharīʿah requirements.

Objectives of the study To confirm and seek the consensus of expert opinions for the purpose of facilitating the formulation of appropriate policy and effective strategy for reporting intangible assets in the Islamic financial services industry, the principal objectives of the study are designed as follows: to highlight issues on specific financial reporting requirements on intangible assets as specified in IAS 38 Intangible Assets and relevant standards (IASB, 2016) with reference to Islamic financial transactions; and to elicit professional accounting and Sharīʿah expert opinion and views on the risk exposures of adopting financial reporting requirements of financial assets as economic consequences of Islamic financial transactions.

Research methodology This study adopts a multi-method approach of content analysis of IAS 38 as well as interviews and focus group meetings with professional accountants, accounting academics and Sharīʿah scholars/advisors. Figure 1 highlights the multi-method approach. A critical review of IAS 38 was done to highlight the pertinent dimensions of intangible assets as specified by the standard. This is followed by an in-depth interview of an audit partner familiar with Islamic banking and finance as well as two separate focus group discussions with professional accountants and accounting academics followed by regulators and Sharīʿah academics/scholars/advisors with significant engagement in the Islamic financial services industry in Islamic banking, takāful and Islamic capital markets. Similar interview/focus group questions were disseminated.

The valuation of intangible assets and the annual impairment test required by accounting standards for intangible assets with indefinite useful life, is a very important in terms of assessing the quality of financial statements. This is a two-step process in which the assessment of the recoverable value of the cash generating units (CGUs) is of crucial importance; this assessment entails a complex economic calculation based on quantitative variables (expected cash flows, discount rate, growth rates of the cash flows to estimate the terminal value) and business policies (scope of the CGU and allocation of intangibles to one or more CGUs), that may be very subjective and thus difficult to monitor. This means that the impairment process lends itself to the risk of opportunistic actions by whoever draws up the financial statements, given that they are indeed in a position to manipulate these variables and forecasts, in order to attain objectives different to those established by standard setters. Many articles have been written on this aspect under the far-reaching research field of the accounting quality of financial statements (Dechow et al., 2010), which examined the many reasons that may induce preparers to abuse the subjectivity they are allowed when performing the impairment test. According to these studies, the main reasons include: earnings management policies (timing and amounts of write-offs; information on the quantitative variables used in the impairment process), supporting stock market prices in order to attain personal benefits (economic incentives and reputation). In recent years, the Italian standard-setter (Italian Standard Setter – OIC, 2009, 2011), the National supervisory authorities (Bank of Italy, Consob, ISVAP, 2009, 2010) and the European market regulator (European Securities and Market Authority, 2013) have all called attention to the importance of this matter, asking preparers of financial statements to apply the accounting standard rules on impairment tests more strictly. After the 2008 financial crisis which reduced the enterprise value, making write-downs of intangible assets due to acquisitions more probable, it became necessary to perform an empirical analysis on the financial statements of Italian banks in the period 2009/2014 to monitor different aspects such as the impairment policies used, compliance with applicable accounting standards and the quality of the financial statements submitted to stakeholders. The decision to focus on Italian banks was made for several reasons: in the years prior to the financial crisis, Italian banks made numerous acquisitions, posting significant intangible assets; the financial crisis caused the stock market prices to plummet, making it necessary to write-off the intangible assets of business combinations; and no specific paper has even been published on banks and other financial institutions, so that this study fills a gap; other articles published to date tend to study different industries and countries (above all, manufacturing in the USA). Moreover, our study focussed on Italian banks, given that the reporting obligation required by IAS/IFRS standards is in addition to that of directive 262/2005 of the Bank of Italy, which imposes predefined and very detailed reporting schemes, meaning that the financial statements of Italian banks provide much more information than the financial statements of other EU banks (or other non-financial companies). Even before the ESMA, the Bank of Italy has more than once raised the question of reporting adequacy, urging Italian banks to comply with disclosure requirements and impairment criteria.

There has been a steady increase in the proportion of intangible assets on the balance sheets of American companies over the last several decades (Calcbench 2016). Nakamura (2008) notes that investment in intangible investment expenditures have risen from roughly 4% of U.S. GDP in 1977 to 9–10% in 2006. Given this increase in significance of intangible assets, a growing literature addresses how investors and regulators respond to this changing composition of the corporate balance sheets (Lev and Gu 2016). This study addresses how an important monitor of financial reporting, namely the auditors, view the presence of intangibles on the balance sheet. Though the issues involved in accounting for intangible assets are similar to those of property, plant, and equipment, an important difference is that the future benefits attribute to intangible assets are usually much less certain than those attributed to tangible assets (Spiceland et al. 2017). U.S.GAAP generally allows companies to record acquired intangibles at purchase price but does not allow capitalization of costs incurred on internally generated intangibles with the exception of legal and filing fees.1 Auditing of intangible assets poses a different set of challenges than auditing of tangibles assets such as property, plant, and equipment. On the one hand, tangible assets need physical verification which may be time consuming and costly. In contrast, intangible assets do not require extensive physical verifications. On the other hand, it may be relatively easier to ascertain the values of tangible assets while for some intangible assets that are especially complex such as goodwill, valuation is much harder as there is considerable discretion involved. (Ramanna and Watts 2012). Thus, whether auditors would perceive the auditing of intangible assets as involving more effort and more risk compared to other assets is an empirical question. The study uses a sample of firms from COMPUSTAT and Audit Analytics over the period 2010–2015 and finds that audit fees are higher for firms with a large proportion of intangible assets on the balance sheet. This result holds for both goodwill and other intangible assets. This relationship is more pronounced for firms with high book to market ratios indicating that auditors may perceive these firms to be of higher risk for overstated values. Although the economy is becoming more knowledge based and thus the importance of intangible assets has significantly increased, relatively few papers have studied how auditors view the growth of intangible assets on the balance sheet (papers that relate to this area include Shipman et al. 2016 who study the relationship between goodwill impairment and fees; Krishnan and Wang (2014) who study the relationship between software development costs and audit fees). Moreover, the Public Company Accounting Oversight Board (PCAOB) notes significant deficiencies in audit of intangible assets (PCAOB 2015). This study contributes to our understanding of this important area. The study also contributes to the literature on determinants of audit fees, by documenting the composition of assets to be another significant factor in determination of audit fees. In addition, the study shows that valuation of assets to be an important factor in the relationship between audit fees and intangible assets.