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UNIVERSITÀ DEGLI STUDI DI PISA
DIPARTIMENTO DI ECONOMIA E
MANAGEMENT
TESI DI DOTTORATO
ACCOUNTING FOR BUSINESS COMBINATIONS:
EMPIRICAL EVIDENCE FROM THE EUROPEAN CONTEXT
Relatore: Chiar.mo Prof. ALBERTO QUAGLI
Dottorando: ELISA RONCAGLIOLO
XXVIII CICLO
CORSO DI DOTTORATO REGIONE TOSCANA IN
“ECONOMIA AZIENDALE E MANAGEMENT”
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In the last three decades, Merger and Acquisition (M&A hereafter) activity showed a significant increase around the world as regards the number of deals as well as their amounts, peaking in 2000 and 2007. Nevertheless, business combinations decrease in the first 2000s and following the 2008 financial crisis, especially in the European context (KPMG, 2010), confirming the strong linkage between investment decision and optimism in financial markets (Gugler et al., 2012).
So far, academic literature has widely investigated M&A activity showing that these corporate events could be analysed from multiple economic subfields (Liao, 2014).
In such a scenario, also accounting issues play a primary role in influencing M&A decisions, affecting information conveyed to investors and other stakeholders as well as future performances of the companies involved in M&A transactions. Particularly, establishing the use of different accounting methods standard setters can affect the whole process of selection, valuation, negotiation and implementation of transactions (Baker et al., 2010).
As regards, in the European context the IAS/IFRS adoption considerably changed rules on accounting for business combinations as well as goodwill eventually arising from the acquisition. Moreover, along the lines of the standards evolution in the US context, IASB sets up a two-phase project starting in 2001 aimed at improving the quality of accounting for business combinations as well as seeking an international convergence on this topic. Major modifications relate to elimination of pooling-of-interests method, establishing that all business combinations have to be accounted for using the purchase method, and introduction of the impairment-only approach in accounting for goodwill.
Additionally, IASB has just undertaken a Post-implementation Review (PIR) in order to consider and discuss unexpected costs as well as implementation problems arising from IFRS 3 adoption. Evidence collected from investors,
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preparers, auditors, and regulators confirms that they generally appreciate the uniformity between IASB and FASB in accounting for business combinations. On the other hand, they present mixed point of views especially as regards opportunity for a return to an amortization-based model of accounting for goodwill, since many of them consider impairment test costly, time-consuming and complex. Additionally, they express concerns on actual implementation of fair value measurements, especially for intangible assets without an active market, due to uncertainty they involve.
In such a perspective, also academic literature has widely investigated accounting treatment of business combinations and goodwill (Boennen and Glaum, 2014).
Accounting literature mainly focused on determinants (Crawford, 1987; Aboody et al, 2000; Ayers et al., 2002) and effects (Ayers et al., 2000; Davis, 1990; Martinez-Jerez, 2008) of the choice between purchase and pooling-of-interests methods as well as studies on earnings management practices related to business combinations (Erickson and Wang, 1999; Louis, 2004), and disclosure (Shalev, 2009; Glaum et al., 2013).
Consistently with results of previous studies, decisions on accounting for business combinations are strongly associated with accounting treatment of goodwill. Therefore, since in many cases goodwill is the largest item on companies’ balance sheet (Boennen and Glaum, 2014), representing 59% of the purchase price on average (Shalev et al., 2013), and in the light of PIR results as well as the current academic debate on accounting for goodwill, this dissertation aims at providing empirical evidence on the determination of goodwill arising from business combinations accounted for under requirements of IFRS 3 Revised. Actually, the extant goodwill accounting literature mainly explores causes and effects of impairments (Li et al., 2011), the value relevance of goodwill (Jennings et al., 1996; Henning et al., 2000) as well as managerial incentives involved in impairment test (Beatty and
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Weber, 2006; Ramanna and Watts, 2012), whereas it does not provide much insight into the initial measurement of purchased goodwill in business combinations (Bassemir and Gebhardt, 2010; Bugeja and Loyeung, 2014). Based on these arguments, I develop three empirical studies that shed light on: (i) the managerial discretion in the allocation of goodwill resulting in the recognition of abnormal goodwill amount; (ii) determinants of provisional goodwill determination; and (iii) influence of full-goodwill option on value relevance of goodwill.
Particularly, the first study examines whether market pressure, measured by poorly received business combination announcements, influences the managerial discretion in purchase price allocation, especially as regards the recognition of abnormal goodwill.
Furthermore, the second study aims at investigating if the decision to account for goodwill on a provisional basis is affected by signalling purpose, rather than potential difficulties in estimating the fair value of assets and liabilities acquired. Finally, the third study examines the potential influence of the full goodwill option on the value relevance of goodwill.
In pursuit of these objectives, I analyse a sample of acquisitions concluded by listed companies over a four years period of 2010-2013 in the European context (considering Zephyr database). Thus, I carry out three empirical analyses considering a sample of acquisitions concluded by Italian, German, French and UK acquirer listed companies.
Main findings suggest the presence of a linkage between goodwill amount and trend in stock prices of the acquirer, rather than specific features of the target company or issues related to the concluded transaction. The findings of these studies and their implications have both theoretical significance and practical importance. Particularly, they could improve standard setter’s activity, especially in order to revise accounting treatment of business combinations. Additionally, they could fuel the current debate on accounting
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for goodwill, highlighting the relevance of the initial determination of goodwill amount.
References
Aboody D., Kasznik R., and Williams M. (2000), “Purchase versus pooling in stock-for-stock acquisitions: Why do firms care?”, Journal of Accounting and
Economics, 29, p. 261-286.
Ayers B.C., Lefanowicz C.E., and Robinson J.R. (2000), “The financial statement effects of eliminating the pooling-of-interests method of acquisition accounting”,
Accounting Horizons, 14(1), p. 1-19.
Ayers B.C., Lefanowicz C.E., and Robinson J.R. (2002), “Do Firms Purchase the Pooling Method?”, Review of Accounting Studies, 7, p. 5-32.
Baker C.R., Biondi Y., and Zhang Q. (2010), “Disharmony in international accounting standards setting: The Chinese approach to accounting for business combinations”, Critical Perspectives on Accounting, 21, p. 107-117.
Bassemir M., and Gebhardt G. (2010), “Accounting for Goodwill: Does the Measurement Date Matter?”, Working Paper.
Beatty A., and Weber J. (2006), “Accounting discretion in fair value estimates: An examination of SFAS 142 Goodwill impairments”, Journal of Accounting
Research, 44(2), p. 257-288.
Boennen S., and Glaum M. (2014), “Goodwill accounting: A review of the literature”, Working Paper.
Bugeja M., and Loyeung A. (2014), “Acquisition date goodwill: determinants and market reaction”, Working Paper.
Crawford D. (1987), “The structure of corporate mergers: accounting, tax and form-of-payment choices”. Ph.D. dissertation, University of Rochester.
Davis M. (1990), “Differential market reaction to pooling and purchase methods”,
The Accounting Review, July, p. 696–709.
Erickson M., and Wang S. (1999), “Earnings management by acquiring firms in stock for stock mergers”, Journal of Accounting and Economics, 27, p. 149-176.
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Glaum M., Schmidt P., Street D.L., and Vogel S. (2013), “Compliance with IFRS 3- and IAS 36-required disclosures across 17 European countries: company- and country-level determinants”, Accounting and Business Research, 43(3), p. 163-204.
Gugler K., Mueller D.C., Weichselbaumer M., and Yurtoglu B.B. (2012), “Market Optimism and Merger Waves”, Managerial and Decision Economics, 33, p. 159-175.
Henning S.L., Lewis B.L., and Shaw W.H. (2000), “Valuation of the Components of Purchased Goodwill”, Journal of Accounting Research, 38(2), p. 375-386.
Jennings R., Robinson J., Thompson II R.B. and Duvall L. (1996), “The Relation Between Accounting Goodwill Numbers And Equity Values”, Journal of Business
Finance & Accounting, 23(4), p. 513–533.
KPMG (2010), “20 anni di M&A. Fusioni e acquisizioni in Italia dal 1988 al 2010”, EGEA, Milano.
Li Z., Shroff P.K., Venkataraman R., and Zhang I.X. (2011), „Causes and consequences of goodwill impairment losses“, Review of Accounting Studies, 16(4), p. 745-778.
Liao R.C. (2014), “What drives corporate minority acquisitions around the world? The case for financial constraints”, Journal of Corporate Finance, 26, p. 78-95. Louis H. (2004), “Earnings management and the market performance of acquiring
firms”, Journal of Financial Economics, 74, p. 121–148.
Martinez-Jerez F.A. (2008), “Governance and Merger Accounting: Evidence from Stock Price Reactions to Purchase versus Pooling”, European Accounting Review, 17(1), p. 5-35.
Ramanna K., and Watts R. (2012), “Evidence on the Effects of Unverifiable Fair-Value Accounting”, Review of Accounting Studies, 17, p. 749–80.
Shalev R. (2009), “The Information Content of business Combination Disclosure Level”, The Accounting Review, 84 (1), p. 239-270.
Shalev R., Zhang I.X., and Zhang Y. (2013), “CEO Compensation and Fair Value Accounting: Evidence from Purchase Price Allocation”, Journal of Accounting
