ON THE ALLOCATION OF TAKEOVER PURCHASE PRICE UNDER AASB1013: A SMALL SAMPLE PILOT STUDY

Kieran James
University of Southern Queensland
Australia

Janice How
The University of Auckland
New Zealand

Peter Verhoeven
The University of Auckland
New Zealand

Abstract:
This pilot study investigates the determinants of the once-off accounting policy choice
made by bidders in the acquisition year to allocate takeover purchase price to target tangible assets, target identifiable intangible assets and/or purchased goodwill. Our sample consists of acquisitions of Australian listed targets by Australian listed bidders, for which full accounting information was available for both target and bidder, during the 1988-2000 period. For our sample bidders, the percentage allocation to identifiable intangible assets under the unconstrained accounting environment averaged a high 21.25%. However, we find no evidence that the percentage allocation to identifiable intangible assets is significantly related to traditional opportunism contracting variables such as leverage or return on assets. We report a significant negative association between the Investment Opportunity Set of the target and the percentage allocation. We find that the use of a Big-4 auditor is positively associated with percentage allocation, consistent with Big-4 auditors being hired to access their knowledge base of acquisition accounting policy choices which both produce favourable financial statement outcomes and are theoretically defensible. This finding is consistent with Watts and Zimmerman’s (1979) “Market for Excuses” theory.