School of Business Master's Thesis Accounting Elina Hämäläinen Accounting treatment for intang PDF
Preview School of Business Master's Thesis Accounting Elina Hämäläinen Accounting treatment for intang
School of Business Master’s Thesis Accounting Elina Hämäläinen Accounting treatment for intangible assets acquired in a business combination under IFRS Supervisor/Examiner: Satu Pätäri Second Examiner: Pasi Syrjä ABSTRACT Author: Elina Hämäläinen Title: Accounting treatment for intangible assets acquired in a business combination under IFRS Faculty: LUT, School of Business and Management Major: Accounting Year: 2015 Master’s Thesis: Lappeenranta University of Technology 127 pages, 4 figures and 25 tables Examiners: Professor Satu Pätäri Professor Pasi Syrjä Keywords: Intangible assets, business combinations, IFRS, goodwill, accounting, media companies The role of intangible assets and the amount of business combinations have increased significantly during the last decades which has caused the need to reform and harmonise the accounting treatment for acquired intangible assets. The aim of this study is to find out how the new accounting standard for business combinations, IFRS 3, has affected the accounting treatment for identifiable intangible assets and goodwill in the examined media companies between 2005 and 2014. The most significant reforms introduced by IFRS 3 have been goodwill impairment test and the fair value accounting for acquired intangibles. This study is conducted by using a descriptive analysis and the empirical data consists of financial statement information of listed Finnish and international media companies. The main objectives of IFRS 3 have been to reduce the amount of acquisition cost allocated to goodwill and allow companies to recognise new intangible assets separately from goodwill. The results of this study show that the amount of the acquisition cost allocated to goodwill has decreased during the examined period and due to the fair value accounting, business acquisitions have made new intangible assets visible that otherwise would have not met the recognition criteria under IAS 38. The application of IFRS has revealed a big amount of invisible assets in the balance sheets but at the same time this has reduced the comparability between companies. TIIVISTELMÄ Tekijä: Elina Hämäläinen Tutkielman nimi: Yritysten yhteenliittymistä nousevien aineettomien hyödykkeiden tilinpäätöskäsittely IFRS –standardien mukaisesti Tiedekunta: LUT, Kauppakorkeakoulu Pääaine: Laskentatoimi Vuosi: 2015 Pro gradu –tutkielma: Lappeenrannan teknillinen yliopisto 127 sivua, 4 kuvaa ja 25 taulukkoa Tarkastajat: Professori Satu Pätäri Professori Pasi Syrjä Hakusanat: Aineettomat hyödykkeet, yritysten yhteenliittymät, IFRS, liikearvo, kirjanpito, mediayhtiöt Aineettomien hyödykkeiden merkitys yritysostoissa on kasvanut merkittävästi samalla, kun pitkään jatkunut keskustelu tilinpäätösten luotettavuuden heikkenemisestä on nostanut esille sen, että yritysten tilinpäätökset eivät riittävissä määrin heijasta aineettomien hyödykkeiden arvoa. Tämän tutkielman tavoitteena on selvittää, kuinka tarkasteltavat mediayhtiöt ovat soveltaneet yritysostoihin liittyvää tilinpäätösstandardia (IFRS 3), jonka päätavoitteena on ollut erityisesti liikearvon käsitteen selkeyttäminen sekä liikearvolle allokoitavan hankintahinnan määrän vähentäminen tunnistamalla aineettomia hyödykkeitä erillään liikearvosta. Samalla standardin tarkoituksena on ollut tuoda uusia aineettomia hyödykkeitä näkyväksi yritysostojen yhteydessä. Käyvän arvon soveltaminen yritysostoissa nouseville aineettomille hyödykkeille on ollut merkittävä uudistus, ja tuonut tavoitteiden mukaisesti näkyväksi uusia aineettomia hyödykkeitä, jotka muutoin olisivat olleet aktivointikelvottomia IAS 38:n mukaisesti. Tämän tutkielman tulokset osoittavat, että liikearvolle allokoitavan hankintahinnan määrä on vähentynyt tarkasteltavissa yrityksissä, mutta samalla ne nostavat esille sen, että yritysten taseet sisältävät näkymätöntä aineetonta omaisuutta, jotka eivät täytä IAS 38:n aktivointiedellytyksiä, ja näin ollen tämä heikentää vertailtavuutta yritysten välillä. ACKNOWLEDGEMENTS The first thing that came into my mind when I started to write these acknowledgements was: Am I really done? I moved to Lappeenranta about five years ago and at that time I did not know what to expect. These past five years have been amazing and I have met so many new and wonderful people and got unforgettable memories. During these years in Lappeenranta, I have also found my own fields of interests. Writing this thesis has been a long process including both ups and down but now it has finally come to an end. First, I want to say thank you to my parents, who have been the most important support for me during my whole life and helped me both financially and mentally and encouraged me to do what I want. I also want to say thank you to my lovely friends, Rosa and Laura, because I would not be in this point without your support and our prolonged lunch conversations. I would like to thank my examiners, Satu and Pasi, for the comments and guidance and help to improve the content of this study. Last, I want to say a special thank you to Juha Nuutinen at Alma Media for all the comments, new development ideas, expertise and the possibility to co-operate with you. I also want to thank everyone who has stood by me during this process and supported me. I would not be here without all this support. However, now it is time to say goodbye to Lappeenranta, leave a student life behind and move on. Elina Hämäläinen Helsinki, 17.10.2015 Table of Contents 1 Introduction .................................................................................................... 1 1.1 Background and motivation ...................................................................... 1 1.2 Literature review ....................................................................................... 2 1.3 Research questions, objectives and delimitations .................................... 6 1.4 Research methodology and data .............................................................. 8 1.5 Structure of the study ................................................................................ 9 2 Accounting for intangible assets ................................................................ 10 2.1 Background ............................................................................................. 10 2.2 The value relevance of financial statements and intangible assets ........ 11 2.3 International Financial Reporting Standards ........................................... 16 2.3.1 Intangible assets ................................................................................. 17 2.3.2 Recognition criteria of intangible assets .............................................. 20 2.3.3 Initial recognition, measurement subsequent to acquisition and amortisation .................................................................................................... 25 2.3.4 Accounting for business combinations ................................................ 26 2.4 Accounting for intangible assets acquired in a business combination under IFRS 3 ..................................................................................................... 29 2.4.1 Accounting treatment for goodwill under IFRS 3 ................................. 30 2.4.2 Fair value accounting of acquired intangible assets ............................ 35 2.4.3 Disclosures related to intangible assets and goodwill ......................... 39 2.5 Theoretical evidence for using IFRS accounting for business combinations ...................................................................................................... 41 2.5.1 Accounting conservatism .................................................................... 42 2.5.2 The effects of the adoption of IFRS on the value-relevance of intangible assets 43 2.5.3 The value relevance of goodwill impairments and fair values ............. 47 3 Accounting treatment for acquired intangible assets in the media companies ............................................................................................................ 52 3.1 Research data and description of research process ............................... 52 3.2 Alma Media ............................................................................................. 55 3.3 Sanoma ................................................................................................... 63 3.4 Schibsted Media Group .......................................................................... 72 3.5 Modern Times Group .............................................................................. 78 3.6 Axel Springer Group ............................................................................... 85 3.7 The main findings and discussion ........................................................... 92 4 Summary and conclusions ....................................................................... 100 4.1 Answers to the research questions ....................................................... 100 4.2 Contribution of the study ....................................................................... 103 4.3 Further research and limitations ........................................................... 107 References ......................................................................................................... 109 LIST OF FIGURES Figure 1. Intangible and tangible business investments in 2009 Figure 2. Intangible asset recognition criteria under IAS 38 Figure 3. Alma Media’s goodwill and identifiable intangible assets amounts (million EUR) in the balance sheet between 2005 and 2014 Figure 4. Axel Springer’s shares of the acquisition costs allocated to goodwill between 2006 and 2014 LIST OF TABLES Table 1. History of IFRS 3 Table 2. The basic information about the examined companies in 2014 Table 3. Alma Media’s balance sheet information Table 4. Alma Media’s income statement information Table 5. Impact of business acquisitions on Alma Media’s assets and liabilities Table 6. Carrying amounts and fair values of acquired assets Table 7. Sanoma’s balance sheet information Table 8. Sanoma’s income statement information Table 9. Impact of business acquisitions on Sanoma’s assets and liabilities Table 10. Carrying amounts and fair values of Nowa Era Table 11. Carrying amounts and fair values of Independent Media Table 12. Schibsted’s balance sheet information Table 13. Schibsted’s income statement information Table 14. Impact of business acquisitions on Schibsted’s assets and liabilities Table 15. Specification of acquired intangible assets Table 16. Modern Times Group’s balance sheet information Table 17. Modern Times Group’s income statement information Table 18. Impact of business acquisitions on Modern Times Group’s assets and liabilities Table 19. Carrying amounts and fair values of acquired assets Table 20. Axel Springer’s balance sheet information Table 21. Axel Springer’s income statement information Table 22. Impact of business acquisitions on Axel Springer’s assets and liabilities Table 23. Carrying amounts and fair values of acquired assets Table 24. Summary of the examined companies’ balance sheet information in 2005-2014 Table 25. Summary of the impact of business combinations on the examined companies’ assets and liabilities in 2005-2014, averages LIST OF ABBREVIATIONS FASB Financial Accounting Standards Board GAAP Generally Accepted Accounting Principles IAS International Accounting Standards IASB International Accounting Standards Board IFRIC FRS Interpretation Committee IFRS International Financial Reporting Standards SFAS Statement of Financial Accounting Standards US GAAP United States Generally Accepted Accounting Principles 1 1 Introduction 1.1 Background and motivation An underlying trend in the nature of economic activity has been one of the most significant reasons for the growing importance of intangibles. Resources spent on intangible assets have conventionally been expensed and treated as costs and not as investments. This traditional accounting treatment for intangibles has reduced the value relevance of financial statements as the importance of intangibles has been continuously increasing and advocates of greater intangible asset reporting often argue that financial statements do not reflect the value of intangible assets. Over the last decades there have been needs for accounting reforms and a general view is that the traditional historical cost approach is no longer useful as the economy has shifted from industrial-based to knowledge-based where intangibles play an important role. (Cañibano et al. 2000;; Hoegh-Krohn & Knivsflå 2000) A study made by OECD (2012) reveals that investments in intangible capital have grown and in many cases, they are even more important than tangible investments. The figure 1. below shows that in many countries intangible investments are as important as tangible and in the USA and UK the total business investments in intangible capital have been even bigger than investments in tangible capital in 2009. As the importance of intangibles has grown there has also been an increased focus on mergers and acquisitions that has caused the need for creating the accounting for intangible assets acquired in a business combination. These transactions can have significant benefits, e.g. increased stakeholder value and market share and cost reductions, for the acquiring company but the related accounting is complex.
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