Transparency Through Recognition of Intangible Assets in Business Combinations Revisited

Abstract: In today’s economic environment, intangible assets are seen as one of the key drivers of enterprise performance, however, how they should be accounted for is a rather controversial issue. The standard IFRS 3- Business combinations, released by the International Accounting Standard Board and adopted in the EU the year 2005, states that listed companies are obligated to recognize acquired intangible assets instead of reporting them as goodwill in completed business combinations. This is in order to increase the disclosure level and the transparency, thus the usefulness of the financial statements. Within economic theory, it is suggested that such an increase may contribute to a reduction of the cost of equity, arising due to asymmetric information in the capital market. Thus, the following research aims to firstly empirically examine whether there are any differences in the recognition of intangible assets between companies that can be explained from an information asymmetry framework, and secondly to empirically examine whether there is a correlation between this recognition and the cost of equity, arising from asymmetric information. This study provides empirical evidence from the listed companies on the Nasdaq OMX Stockholm Stock Exchange’s, Small, Mid, and Large Cap lists during the years 2005 to 2012. The study was made possible by several statistical tests, both non-parametric and parametric. The non-parametrical tests, that were mainly used to examine the differences in the recognition, exhibit that the proportion of intangible assets recognized in business combinations not only differs between the examined years but also between, different sized companies and acquisitions, industries, and companies with various financing needs. In the study three different proxies for the cost of equity were used and tested in separate parametric statistical models. A significant negative correlation between the recognition of intangibles, in accordance with IFRS 3, and the cost of equity is exhibited in one of these models, when it is controlled for various firm characteristics and incentives for disclosure. This finding demonstrates that companies, which recognize a larger share of intangible assets, in business combinations, generally experience a lower cost of equity. Further on, this finding serves as evidence for that it is not only the total level of disclosure that matters, but also the level of compliance with the specific standard, IFRS 3.