Identifying Intangible Assets in a Business Combination –Accounting Choices and the Development of Accounting Practice –A Swedish study of IFRS 3 – Business Combinations

Abstract: Background and problem discussion: According to IFRS 3 – Business Combinations, companies are required to identify and recognize intangible assets not previously reported in the acquired company separately from goodwill when possible. However, it is up to the company to interpret and assess how the transaction is best reported in the financial statements since the regulations issued by the International Accounting Standards Board (IASB) are principle based. This will enable an opportunistic behavior when selecting accounting methods since the company can decide whether the non-reported intangible assets (NRIA) acquired in the business combination should be reported as identified intangible assets or goodwill, according to their personal interests. Previous research has showed that companies have an opportunistic behavior and are affected by different factors when selecting accounting methods. Another aspect of principle based regulations is that, since they require interpretation and assessments, companies might not yet possess the knowledge of how to apply the new standards when they are first implemented. Previous research suggests that new standards are implemented with a delay and that a learning curve might exist. The knowledge of how to identify intangible assets in a business combination according to IFRS 3 may increase in the future and the accounting practice might therefore develop over time. Purpose: The purpose of this thesis is to examine accounting choices related to IFRS 3 and how different incentives may affect the companies in the selection of accounting methods. Furthermore, we want to establish whether the accounting practice has evolved since IFRS 3 became mandatory in 2005. Methodology: This thesis is a quantitative study of the business combinations carried out by Swedish companies listed on NASDAQ OMX Stockholm. The data is collected from the annual reports and the 564 business combinations included in the study were carried out during the years 2005 – 2011. Analysis and conclusion: The results of this study show that large companies compared to small companies do in fact allocate a larger proportion of the NRIA to identified intangible assets, which is in line with previous research. Hence, large companies are affected by political costs when accounting for business combinations. However, the statistical tests regarding the indebtedness of companies proved to be inconsistent with previous research. This study was not able to conclude that companies with high indebtedness compared to companies with low indebtedness allocate a larger proportion of the NRIA to identified intangible assets, i.e. the companies in this study are not affected by contract costs. Finally, previous research has indicated that a learning curve exists regarding the implementation of new standards. However, this study could not identify a development of accounting practice regarding the knowledge of identifying intangible assets according to IFRS 3.