Question

Accounting for intangible assets. Discuss relevance versus reliability as they apply to reporting on the intangible assets of the firm.

Answer 1

The intangibles’ value relevance studies have known an important interest since the early of 90’s. Sougiannis (1994) concluded that investors place a high value on intangible investments; he estimated that on average, a one-dollar increase in R&D expenditures produces a five-dollar increase in market value. He distinguished between the indirect effect, when R&D expenditures affect market values through earnings, and the direct effect that reflects new information conveyed by R&D. He assessed also that on average the indirect effect is more than the direct effect. Aboody and Lev (1998) found that capitalized software amounts summarize relevant information; they associate with market variables and future earnings.

Seethamraju (2003) showed significant abnormal returns related to brands capitalized as a part of businesses combination. He observed abnormal returns with companies that reported quantitative information more than those that reported only qualitative information. Goodwin and Ahmed (2006) confirmed the indirect effect of intangibles on market values; they found that intangible assets increase the value relevance of earnings. Zhao (2002) showed that the reporting of total R&D costs increases the association of stock price with accounting earnings and book values in countries with complete R&D expensing. The allocation of R&D costs between capitalization and expense provides incremental content over that of total R&D costs in countries permitting conditional capitalization of R&D costs.

In France, the early studies about the value relevance of intangibles concerned by the R&D, but the results were partially supported those that found in USA. Ding and Stolowy (2003) tested whether the R&D capitalization improves the value relevance of accounting numbers. They did not find any positive results in this direction, what reflects the particularities of financial disclosure in French, and the differences between French and Anglo-American’s corporate governance model. From a sample of 95 French companies during 1998 to 2000, Cazavan-Jeny and Jeanjean (2003) found a positive association of capitalized R&D with stock prices and returns, and negative association of expensed R&D with stock prices and returns. This means that R&D accounting represents a signal reduces the information asymmetry about R&D projects. Loulou and Triki (2008) denoted that activated R&D constitutes preferred treatment for managers, not only to signal the investors about the future perspectives of their R&D programs, but also to respond opportunely to the contractual stakes, in order to minimize political costs or smoothing earnings.

Thibierge (2001) interested by intangible assets as a stake of financial reporting, by studying 176 French companies and 85 Spanish companies that listed in 1999 or 2000. The results indicated that intangible assets did not affect the companies’ market valuation, but they permit liberating from liquidity or debt covenants, there are important differences between both countries. Cazavan-Jeny (2003) concerned by the significant gap between market values and book values of French companies. Using a sample of 470 companies, during 1994 to 1999, he examined whether this gap can be attributed to the fact that intangible assets are not reflected in financial statements. The results indicated a significant statistical association of market-to-book ratio with capitalized goodwill. However, any significant statistical link has been observed neither with other capitalized intangibles nor with expensed intangibles. Those results have been explained by the multitude of accounting treatments concerning intangible expenditures.

Using a sample of companies that listed in some European financial markets (UK, France and Spain) during 1993 to 2003, Casta and Ramond (2005) did not find any association between intangibles and market returns. They suggested that investors have a short-term view or "myopic" in constructing of their portfolio, what penalizes companies that reported high intangible investments in their financial statements, which have a long-term view. In order to test the role of intangibles in improving firm’s value, Jamoussi, Baklouti and Affes (2007) used a sample of 391 French listed companies during 2001 to 2004. The results have confirmed the importance of earnings per share and intangibles for companies’ valuation. However, they showed a significant decreasing value relevance of traditional accounting information for the high technology companies’ valuation, while the intangibles have affected positively and significantly the market values of those companies.

Lenormand and Touchais (2008) asked question about the role of IFRS adoption in improving the informational content of intangible assets. After reviewing previous studies, they concluded that IFRS adoption does indeed improve the informational content of accounting measures. Nevertheless, the data analysis showed significant disparity between the reported amounts of goodwill and intangible assets under different standards. It arises that intangible assets are only partially more value relevant under IFRS. Boulerne and Sahut (2009) tested the information content of intangible assets under IFRS when compared with local GAAP for French listed companies. They showed that the transition to IFRS did not affect the overall amounts of intangibles, even though it operated substitution effects in favor of goodwill. However, the total amounts of intangible assets and goodwill together was value relevant under IFRS. They implied that financial markets can better integrate such contributions into share prices and returns, especially for companies with high intensity of intangible assets.

For the same precedent objectives, Sahut, Boulerne and Frédéric (2011) compared the value relevance of intangible assets under IFRS with local GAAP for European listed companies; their sample included 1855 companies for ten European countries. The study has been carried out over six-year period, from 2002 to 2004 for local GAAP, and from 2005 to 2007 for IFRS. The results tend to confirm partly the findings of Boulerne and Sahut (2009). It arises that book values of identifiable intangible assets were higher and have more informative value to explain share prices and stock returns under IFRS than local European GAAP. However, goodwill has less value relevance under IFRS than local European GAAP. Exception of Italy and Finland, the identifiable intangible assets provided more value relevance information than intangible assets that have been transferred into goodwill.