The Australian Market Perception Of Goodwill And Identifiable Intangibles

Accounting for goodwill and identifiable intangibles is one of the most controversial issues in financial reporting. Preliminary evidence suggests that the materiality of goodwill and identifiable intangible assets in corporate statements of financial position for a large number of firms is the reason for the considerable attention given to goodwill and identifiable intangibles. The present study analyses the Australian market perception of goodwill and identifiable intangibles in the determination of firm's market valuation. It also explores the market perception of assets goodwill and identifiable intangibles relative to other tangible assets. Evidence suggests that there is a strong positive association between reported goodwill and identifiable intangible asset values and equity market values, concluding that the market appears to perceive reported goodwill and identifiable intangibles as assets in the determination of firms' market valuation. Evidence also suggests that the highest coefficient value among the variables of the study model (the asset-based model) belong to reported asset goodwill and to a lesser extent, other net assets. Thus, it is concluded that, on average, the market perceives reported goodwill as having a higher weight than other financial position statement items in the asset-based model, whereas the market appears to discount reported identifiable intangible assets relative to other items in the model when valuing firms. Further, evidence suggests that there is a negative and inconsistently significant association between equity market values and write-offs of goodwill and identifiable intangibles, concluding that such associations may vary substantially across firms, thus, the use of standardised amortisation requirement may be appropriate.

Accounting for intangibles has been subjects of controversy in Australia and in many other countries (Grant, 1996). The central issue appears to be in the recognition of intangibles as assets. If intangibles are presumably recognised as assets, further controversy exists on the measurement of intangibles and the accounting treatment that best represent the resources and performance of the company. The Australian goodwill standard (AASB 1013/AAS 18) requires goodwill, comprising the future benefits from unidentifiable assets, to be recognised as an asset in the statement of financial position only when it has been purchased in a business acquisition. Goodwill is then to be amortised over its expected useful life, subject to a maximum of twenty years. However, there has been no specific accounting standard governing accounting for identifiable intangible assets in Australia. The issue is so contentious that in 1992 an exposure draft on identifiable intangible assets, ED 49 "Accounting for Identifiable Intangible Assets", was withdrawn three years after issue.

Goodwill and identifiable intangibles have been the subject of considerable attention by the Australian Accounting Standards Board (AASB). For instance, the AASB recently considered a paper titled "Strategy Paper: Intangible Assets" (AASB, 2000). This paper outlines the key issues to be addressed in a project to review accounting for intangible assets. The strategy calls for the issue of recognition and measurement for intangibles among other issues. In 1999, the Australian Accounting Research Foundation (AARF) issued Accounting Interpretation AI 1 "Amortisation of Identifiable Intangible Assets" that was prepared by the Public Sector Accounting Standards Board (PSASB) and the AASB. AI 1 outlines the Boards' view that identifiable intangible assets including brandnames, mastheads, licences and trademarks fall within the scope of Accounting Standards AASB 1021/AAS 4 "Depreciation of Non-Current Assets" and that in most instances such assets have depreciable amounts.

The Australian Securities and Investment Commission (ASIC) has also addressed goodwill and identifiable intangibles. The ASIC issued the Media Release (99/219), concerning the ASIC's view with respect to 1998 financial reports of 111 listed companies identified a number of instances where intangible assets, including tradenames, customer databases and licences, were not amortised (ASIC, 1999). The release reported that ASIC expects companies to amortise intangible assets in accordance with AASB 1021/AAS 4 and has already requested some companies to review and revise their approaches for their intangibles. In 1993, ASIC issued the Practice Note (PN 39) and indicated that the amortisation method of "inverted sum of the years digits" (ISOYD), only in rare cases, satisfies the requirements of AASB 1013. Moreover, the Full High Court of Australia included goodwill and identifiable intangibles in its legislation agenda. The recent decision of the Full High Court in the case of FC of T v Murry 98 ATC 4585 has made some important observations that relate to the issues of identifying and valuing goodwill. While there is now recognition that identifiable intangible assets, such as a tax license, do not give rise to goodwill, it needs to be recognised that such assets contribute to the generation of goodwill insofar as they add to the forces which attract customs (Nethercott, 1998).

The IASC, the UK Accounting Standards Board (ASB) and the US Financial Accounting Standards Board (FASB) have included goodwill and identifiable intangibles on their agendas. The issue of goodwill recognition is especially contentious in the US because the FASB recently issued Statement of Financial Accounting Standards (SFAS 142) "Goodwill and Other Intangible Assets", that eliminates amortisation of goodwill and establishes an accounting treatment to recognise goodwill impairment. The source of conflict is that the US tradition treatment of accounting for goodwill was to capitalise and amortise over a period not to exceed 40 years. The alleged advantages for the non-amortisation and impairment model to US firms have been the favourable earnings and the increase in earnings per share that result from avoiding future amortisation expenses (Schneider et al, 2001).

Based on the above discussion, it is apparent that goodwill and identifiable intangibles are important and pervasive issues for the accounting standard-setters and other interested parties. The considerable attention is attributable to the increased reporting and materiality of goodwill and identifiable intangible assets on corporate statements of financial position.