Accounting Recognition of Intangible Assets: Theory and Evidence on Economic Determinants

Abstract

This paper examines the extent to which management makes accounting choices to record intangible assets based on their insights into the underlying economics of their firm. It exploits a setting in which management has accounting discretion to record a wide range of intangible assets. The results suggest that management's choice to record intangible assets is associated with the strength of the technology affecting the firms operations, the length of the technology cycle time, and propertyrights-related factors that affect the firm's ability to appropriate the investment benefits. These effects are more important than other contracting and signaling factors consistent with the underlying economics operating as a first-order effect as envisaged by GAAP. The results also indicate that the intangible assets management has a voluntary (unregulated) choice to record—identifiable intangible assets—are more highly correlated with underlying economic factors than the regulated classes, purchased goodwill and R&D assets. This result suggests that limiting managements' choices to record intangible assets tends to reduce, rather than improve, the quality of the balance sheet and investors' information set.

Determinants of the Accounting Choice between Alternative Reporting Methods for Interests in Jointly Controlled Entities

“…Few papers consider real influences in accounting choice. They include the LIFO/FIFO inventory model developed by Lindahl (1989), the consolidation studies developed by Whittred 1 (1987) and by Mian and Smith 2 (1990), the Whittred and Zimmer 3 (1994) study on joint ventures and the intangible assets study developed by Wyatt (2005). Second, we provide new evidence on the extent to which the venturer's decision about the reporting method for interests in JCEs is a consequence of the type of JCEs of the venturer.…”

“…Mian and Smith, 1990;Whittred and Zimmer, 1994;Wyatt, 2005), we hypothesize that the type of JCE (Scale or Link) will map into the accounting choice through its influence on management beliefs about the degree of control over the venturer's share of the JCE's assets and liabilities. In addition, bearing in mind that venturers have to choose a reporting method for all the interests in JCEs and not for each of them individually, the following relationship is expected between the type of JCE and the accounting choice for reporting interests in JCEs: as the majority of a venturer's JCEs is Link, the venturer is more likely to report interests in JCEs by proportionate consolidation than by the equity method.…”

Firm Life Cycle and the Value Relevance of Intangible Assets: The Impact of FRS 138 Adoption

“…Firms that are included in the sample are those in the intangible-intensive industry identified in previous studies (see for example [28]- [30]). The industry sectors considered in this study include Industrial Products, Consumer Products, Trading/Services and Technology.…”

How Intangible Dynamics Influence Firm Value

“…Previous research on the value relevance of intangible assets has provided evidence that omission of intangibles from a balance sheet is a serious deficiency, particularly because value for modern businesses is seen to come more from an intangible asset base than from physical assets (e.g., Abody and Lev [1]; Wyatt [2]; Penman [3]). Proponents of the capitalization of intangibles argue that earnings that reflect the effects of this capitalization are significantly more highly associated with stock prices and returns.…”