eThesis - School of Business electronic theses

The purchase price allocation process introduced by IFRS 3 provides a unique and new setting to study the reliability and value relevance of acquired intangible assets and goodwill. The purpose of this study is to examine the purchase price allocation and to analyze whether the separate recognition of acquired net assets adds the quality of financial reporting. This study focuses on the value relevance of acquired intangible assets and on the possible bias, stemming from managerial discretion, in their valuation.

This study is conducted with European data. The sample consists of business combinations which were completed between 1.1.2005 and 31.12.2007 and were reported under IFRS 3. The data concerning purchase price allocation is hand collected from the financial statements of the sample companies. Additionally, supplementary financial data is extracted from other sources. Multiple regression models are used as the primary research method in this study.

According to the results, reporting of purchase price allocation adds the quality of financial information. The study provides evidence that intangible assets (other than goodwill) measured in fair values are value relevant. The results regarding the value relevance of goodwill are mixed. However, more support is found that goodwill contains no value relevant information to investors.

Evidence is also found that there could be significant differences in the extent of bias in intangible asset (other than goodwill) valuation of firms with different level of incentives to allocate the purchase price strategically. Regarding goodwill some tentative results indicate that the allocation of goodwill to operating segments for impairment testing purposes might be done strategically because more profitable operating segments seem to receive more goodwill allocation. Markets seem, however, to take the risk of strategic purchase price allocation into account and based on the results the acquired intangible assets and goodwill are valued at discount for riskier firms.