Adoption of International Financial Reporting Standard

Keryn Chalmers, Greg Clinch & Jayne M. Godfrey

Adoption of International Financial Reporting Standards: Impact on the Value Relevance of Intangible Assets

n this paper we investigate the association between share prices of Australian firms and capitalised goodwill and identifiable intangibles reported under two accounting regimes. The first regime is AGAAP. The second regime is AIFRS, which have been in effect subsequently since 1 January 2005. Our objective is simple – to provide evidence of the extent to which intangible assets measured under AIFRS reflect information that is useful to investors beyond that reflected in AGAAP financial reports. Accounting for intangibles (that is, goodwill and identifiable intangibles such as patents or brand names) has been one of the most controversial issues in the globalisation of accounting standards. Opinions are divided regarding whether some or all intangible assets should be capitalised and if so, whether they should be amortised or subject to annual impairment tests and written down only upon evidence that their value is impaired. Adopting AIFRS fundamentally changed Australian recognition and measurement practices for goodwill and identifiable intangible assets. Accounting for goodwill shifted from an amortisation regime to an impairment regime. Further, capitalising research expenditure is now prohibited, certain internally generated intangibles can no longer be capitalised, and capitalised identifiable intangibles may be revalued now only if an active and liquid market exists. Thus, Australia provides an interesting regulatory setting in which to investigate the relative merits of alternative methods of accounting for intangible assets. We exploit this opportunity to compare the association between share prices and intangible assets measured under AIFRS with the association between share prices and the same intangible assets measured under AGAAP. To do this, we compare (a) share price associations with capitalised...