Unreliable Accoutning of Intangible Assets in a Digital Era : A study on the association between reliability and value relevance of intangible assets

Abstract: Background: The purpose of accounting and financial reporting is to provide useful information for its users in their decision-making. The importance of intangible assets for companies in the modern digital economy has led to debates concerning how it should be presented in accounting. As of today, the relevance and reliability of intangible assets can be questioned since large values of intangibles are left out of accounting and financial reports. Purpose: The aim of the study is to investigate the association between reliability and value relevance of intangible assets.  Method: Using the Feltham and Ohlson (1995) model, we test the association between intangible assets and market valuation of firms. We divide the sample into reliable and unreliable and test whether there is any difference in value relevance of intangible assets between the groups. Conclusion: The result indicates, without statistical significance, that reliability seems to matter more for goodwill than for total intangibles and other identifiable intangibles. Moreover, we suggest that investors seem to focus more on accounting standards and uncertainty than management discretion when assessing reliability of intangible assets. However, we are not satisfied with how reliability has been operationalized earlier and this study reinforces our doubts. Thus, among other suggestions we propose further research directed towards investors to find out whether reliability is important and what they consider as reliable.