The document discusses the inefficient valuation of intangible assets in capital markets and the problems that result. It identifies three main causes of inefficient valuation: 1) The quality of financial information provided does not adequately disclose information about intangible assets. 2) Market imperfections like information asymmetry allow insider gains. 3) Financial analysts have limitations that can lead to biases in their earnings forecasts, like cognitive biases, incentives, and time constraints. The document suggests improved disclosure requirements and market regulations could help address these issues.
The document discusses key issues around intellectual property (IP) due diligence and monetization during mergers and acquisitions. It outlines five critical elements for maximizing IP value, including understanding where the greatest strategic and realizable value lies. The document also discusses when IP valuation is necessary, how to identify and bundle IP assets for value, and various methods for monetizing IP assets, including sales, licensing, and litigation. It provides a case study of a multi-jurisdiction bankruptcy and IP sale involving a global automotive supplier.
This document discusses maximizing the value of corporate intellectual property through valuation and monetization strategies. It outlines five critical elements for maximizing IP value, including understanding where the greatest strategic value lies and how to extract maximum value. Potential stakeholders who care about IP value are identified. The document also discusses methods for monetizing IP assets, such as licensing, sale, collateralization and securitization. Specific strategies and case studies are provided to illustrate how IP value has been maximized through different approaches.
The document discusses valuation of intangible assets and intellectual property. It provides examples of 6 case studies where intangibles were valued for various purposes including litigation, bankruptcy proceedings, estate planning, and corporate financing deals. Valuation methods discussed include market approach, income approach, and cost approach. The case studies illustrate how intangibles were identified and valued, and how the valuations were used to determine damages or asset value in different contexts.
This document provides an overview of valuation methods for intangible assets. It discusses the Interbrand Best Global Brands 2020 report and highlights new entrants to the top 100 brands. It then defines intangible assets and outlines the major types. The document reviews several valuation approaches for intangibles, including the income approach, cost approach, and market approach. It provides details on specific valuation methods like relief from royalty, brand earnings multiple, discounting, multi-period excess earnings, and assembled workforce.
1. The document discusses various types of mergers and acquisitions (M&A) transactions including horizontal and vertical integration, diversification, advantages of M&A, and issues from different perspectives of acquirers and target companies.
2. Key regulatory considerations for M&A transactions in India are discussed including the Companies Act, Income Tax Act, Foreign Exchange Management Act, Competition Act, and SEBI regulations.
3. Structures and processes for acquisitions, mergers, demergers, and other spin-offs are outlined along with transaction issues and taxation implications.
purchase price allocation (PPA) is an application of goodwill accounting whereby one company (the acquirer), when purchasing a second company (the target), allocates the purchase price into various assets and liabilities acquired from the transaction.
- EPS accretion/dilution is the most emphasized metric used to evaluate M&A deals between public companies according to a survey. However, EPS accretion does not necessarily create value and EPS dilution does not necessarily destroy value.
- While an EPS accretive deal increases reported EPS, it often comes with a lower growth rate for earnings. This reduced growth is not factored into the valuation, counterbalancing the higher EPS. No real value is created.
- Synergies from a deal are what can potentially create value, not whether the deal is EPS accretive or dilutive. Some highly dilutive deals may offer the greatest opportunities for synergies. Emphasizing EPS over fundamentals can lead companies to pursue
Project Report on Trend Analysis of Mutual FundRinshi Singh
Financial sectors, Growth Drivers of financial sector, Porter's model of financial sector, 5nance.com company details, company usp,KYC Verification process, Mutual funds performance
The document discusses key issues around intellectual property (IP) due diligence and monetization during mergers and acquisitions. It outlines five critical elements for maximizing IP value, including understanding where the greatest strategic and realizable value lies. The document also discusses when IP valuation is necessary, how to identify and bundle IP assets for value, and various methods for monetizing IP assets, including sales, licensing, and litigation. It provides a case study of a multi-jurisdiction bankruptcy and IP sale involving a global automotive supplier.
This document discusses maximizing the value of corporate intellectual property through valuation and monetization strategies. It outlines five critical elements for maximizing IP value, including understanding where the greatest strategic value lies and how to extract maximum value. Potential stakeholders who care about IP value are identified. The document also discusses methods for monetizing IP assets, such as licensing, sale, collateralization and securitization. Specific strategies and case studies are provided to illustrate how IP value has been maximized through different approaches.
The document discusses valuation of intangible assets and intellectual property. It provides examples of 6 case studies where intangibles were valued for various purposes including litigation, bankruptcy proceedings, estate planning, and corporate financing deals. Valuation methods discussed include market approach, income approach, and cost approach. The case studies illustrate how intangibles were identified and valued, and how the valuations were used to determine damages or asset value in different contexts.
This document provides an overview of valuation methods for intangible assets. It discusses the Interbrand Best Global Brands 2020 report and highlights new entrants to the top 100 brands. It then defines intangible assets and outlines the major types. The document reviews several valuation approaches for intangibles, including the income approach, cost approach, and market approach. It provides details on specific valuation methods like relief from royalty, brand earnings multiple, discounting, multi-period excess earnings, and assembled workforce.
1. The document discusses various types of mergers and acquisitions (M&A) transactions including horizontal and vertical integration, diversification, advantages of M&A, and issues from different perspectives of acquirers and target companies.
2. Key regulatory considerations for M&A transactions in India are discussed including the Companies Act, Income Tax Act, Foreign Exchange Management Act, Competition Act, and SEBI regulations.
3. Structures and processes for acquisitions, mergers, demergers, and other spin-offs are outlined along with transaction issues and taxation implications.
purchase price allocation (PPA) is an application of goodwill accounting whereby one company (the acquirer), when purchasing a second company (the target), allocates the purchase price into various assets and liabilities acquired from the transaction.
- EPS accretion/dilution is the most emphasized metric used to evaluate M&A deals between public companies according to a survey. However, EPS accretion does not necessarily create value and EPS dilution does not necessarily destroy value.
- While an EPS accretive deal increases reported EPS, it often comes with a lower growth rate for earnings. This reduced growth is not factored into the valuation, counterbalancing the higher EPS. No real value is created.
- Synergies from a deal are what can potentially create value, not whether the deal is EPS accretive or dilutive. Some highly dilutive deals may offer the greatest opportunities for synergies. Emphasizing EPS over fundamentals can lead companies to pursue
Project Report on Trend Analysis of Mutual FundRinshi Singh
Financial sectors, Growth Drivers of financial sector, Porter's model of financial sector, 5nance.com company details, company usp,KYC Verification process, Mutual funds performance
The purpose of this document is to outline the background to purchase price allocation, the process as well as commonly used methodology in valuing intangible assets
The document discusses professional opportunities for Chartered Accountants in business valuation in India. It provides an overview of the history of business valuation in India, from early methods prescribed under tax laws to current standards and regulations. Key developments include the implementation of registered valuer provisions in the Companies Act 2013 and valuation rules in 2017. The valuation process involves understanding the purpose, analyzing financials, industry trends, forecasting performance, selecting appropriate methods, and documenting the report. Common valuation approaches include income, market and asset-based methods. Discounts and premiums are also considered.
Objectives & Agenda :
Transfer Pricing is one of the most litigious areas in Taxation. In this Webinar we shall look at some of the recent Judicial Precedents in Transfer Pricing Law with the aim of understanding the issues which arise and the views taken by the Authorities and the Court of Law. The Webinar discusses the facts of the case, issues and the Principles held by the Courts in each of these Decisions.
COMPANY ANALYSIS-HINDUSTAN UNILEVER LTDSaiLakshmi115
Introduction to company analysis# About the company in short # vision # mission # Standard of conduct # culture and value # business model of HUL # swot analysis of HUL # management and its structure # corporate culture and governance # Quantitative analysis of the company- HUL: Earnings, Leverages, competitive edge, production efficiency, financial analysis, cash flow, Ratio analysis # conclusion
This document discusses key valuation aspects that must be considered when conducting a family business settlement valuation. It identifies several macro aspects that need to be evaluated such as the terms of the proposed settlement, ownership and control of businesses and assets, operating vs. non-operating assets, valuation date, and scope of the assignment. It also discusses the need to analyze financial and non-financial data, understand industry trends, value both operating and non-operating assets, and consider applicable discounts or premiums. Finally, it outlines various valuation approaches and methodologies that may be used to value businesses and assets, as well as regulatory valuation requirements.
The document provides an overview of valuation concepts, principles, standards and processes. It defines key terms related to valuation such as standard of value, premise of value, fair market value. It discusses valuation approaches like market, income and cost approach and methods under them such as comparable companies method. It summarizes the Indian Valuation Standards for valuations in India.
This document provides a summary of Vishal Kapoor's project report on reporting intangible assets. It acknowledges those who assisted with the project and provides a table of contents that outlines sections on the introduction to intangible assets, reasons for measuring intangibles, a case study on Rolta India measuring brand value and human resource valuation, difficulties in reporting intangibles, and conclusions. The introduction defines intangible assets and explains why more companies are finding value in intangible rather than physical assets.
The document discusses an agenda for a valuation training session. It covers an overview of valuation including the meaning of valuation, reasons for valuation, history of business valuation in India, guiding principles, valuation methodologies, and skills required. It also discusses valuation of securities and financial assets, new regulations, and the valuation process. Key points covered include the income, asset, and market approaches to valuation as well as guidance under international valuation standards.
This document provides an overview and history of valuation in India under different regulatory statutes. It discusses the valuation of companies for mergers and acquisitions, preferential allotment, and other transactions under the Companies Act, SEBI regulations, RBI guidelines, and Income Tax laws. The key valuation approaches discussed are income, asset, and market approaches. It outlines the emerging opportunities for registered valuers in India and changes expected with the implementation of new valuation standards and IndAS.
Chapter C.1 - UN TP Manual: Legal Environment for Establishing TP RegimesDVSResearchFoundatio
This document summarizes key aspects of updating transfer pricing regimes based on Chapter C.1 of the UN TP Manual. It discusses the general legal environment for transfer pricing, including an overview of extant TP rules in countries and specific domestic TP rules. Regarding updates, it emphasizes the importance of gathering information through regional cooperation, engagement with international organizations, and participation in capacity building initiatives to regularly evaluate and improve domestic TP legislation.
This document discusses accounting for intangible assets and brands. It defines intangible assets and notes their importance, comprising 80% of company value on average. Common intangible assets include patents, copyrights, franchises, trademarks and goodwill. Intangible assets must be identified, costs measured and collected, amortized over their useful life, and reflected on financial statements. Brands are also considered intangible strategic assets that create goodwill and market share. Brand accounting requires collection and allocation of brand creation costs, valuation of the brand, and amortization of brand costs on financial statements. Valuation methods for brands include cost, market and income approaches.
The document discusses regulatory valuation requirements in India for various transactions under different laws. It outlines how valuation is required for fresh issues of shares, transfer of shares, business combinations/schemes of arrangement, employee stock ownership plans, and insolvency proceedings. It also covers the emerging opportunities for registered valuers in India with the new Companies (Registered Valuers and Valuation) Rules, 2017 which regulate the valuation profession. Key points include the qualification and experience requirements to become a registered valuer for different asset classes like land/buildings, plant/machinery, and financial assets.
Key Takeaways:
- Issues in Comparability Analysis and Handling Information Deficiencies
- Losses and Allocation of Covid-19 Specific Costs
- Factoring Government Assistance
- Solutions for Advance Pricing Agreements under Negotiation
Way Forward
The document summarizes key aspects of mergers and acquisitions under the Companies Act 2013 in India. It discusses various tools of restructuring like merger, amalgamation, demerger, acquisition of shares. It provides details of the regulatory framework, approval process, benefits and motives. It specifically explains provisions for fast track mergers, cross border mergers, and single window clearance which allows related proposals to be considered together with a scheme.
The document discusses accounting standards for long-lived assets, including intangible assets. It notes that intangible assets are nonphysical assets that provide future economic benefits. The standard provides guidance on recognizing, measuring, and disclosing intangangible assets. It also discusses impairment testing of intangible assets to ensure they are carried at recoverable amounts. The standard applies to identifiable intangible assets and goodwill, but not to internally generated goodwill or brands.
The document concludes by noting that while IP valuation is complex, it is an important factor in a business's success, and there are professional services that can assist with the valuation process.
The document provides an overview of accounting for intangible assets under IAS 38. It discusses the definition of intangible assets, recognition criteria, measurement at cost or fair value, amortization of intangible assets with finite useful lives, impairment testing, and disclosure requirements. The document also covers topics such as government grants, internally generated intangible assets, revaluation model, and differences between IFRS and Indian GAAP treatment of intangible assets.
The inaugural edition of our accounting and financial reporting guide, Consolidation and equity method of accounting, addresses the accounting for consolidation matters under U.S. GAAP reflecting the latest standards. The guide discusses the consolidation framework and equity method of accounting, providing specific guidance and examples related to various topics such as:
The consolidation framework
Variable interest entities (VIEs)
Voting interest entities (VOEs)
Equity method investments
Joint ventures (JVs)
Intercompany transactions
The document discusses various topics related to managing financial resources for an organization. It covers elements of cost for a business including material, labor, and overhead costs. It also discusses information required to manage financial resources such as labor costs, material costs, overhead costs, and revenue. Regulatory requirements and accountability to stakeholders are important considerations when managing financial resources. Budgetary control is a key method used by Royal Dutch Shell PLC to manage its finances.
International accounting regulation by the united nations a accounting2010
The document discusses international efforts by the United Nations to regulate accounting standards for transnational corporations since the 1970s. It analyzes these efforts through the political power framework of Robert Dahl. A majority of UN member nations sought to impose binding accounting regulations on TNCs via the UN, while a small minority of developed nations resisted increased regulation and supported corporate interests. Despite intensive negotiations over 18 years, the change-seeking nations did not succeed in implementing their reform agenda, with the minority status quo defenders prevailing instead. The document aims to explain this paradox by analyzing the decision-making process and behaviors of participants using Dahl's pluralist power model focused on observable conflicts, behaviors, and outcomes.
The purpose of this document is to outline the background to purchase price allocation, the process as well as commonly used methodology in valuing intangible assets
The document discusses professional opportunities for Chartered Accountants in business valuation in India. It provides an overview of the history of business valuation in India, from early methods prescribed under tax laws to current standards and regulations. Key developments include the implementation of registered valuer provisions in the Companies Act 2013 and valuation rules in 2017. The valuation process involves understanding the purpose, analyzing financials, industry trends, forecasting performance, selecting appropriate methods, and documenting the report. Common valuation approaches include income, market and asset-based methods. Discounts and premiums are also considered.
Objectives & Agenda :
Transfer Pricing is one of the most litigious areas in Taxation. In this Webinar we shall look at some of the recent Judicial Precedents in Transfer Pricing Law with the aim of understanding the issues which arise and the views taken by the Authorities and the Court of Law. The Webinar discusses the facts of the case, issues and the Principles held by the Courts in each of these Decisions.
COMPANY ANALYSIS-HINDUSTAN UNILEVER LTDSaiLakshmi115
Introduction to company analysis# About the company in short # vision # mission # Standard of conduct # culture and value # business model of HUL # swot analysis of HUL # management and its structure # corporate culture and governance # Quantitative analysis of the company- HUL: Earnings, Leverages, competitive edge, production efficiency, financial analysis, cash flow, Ratio analysis # conclusion
This document discusses key valuation aspects that must be considered when conducting a family business settlement valuation. It identifies several macro aspects that need to be evaluated such as the terms of the proposed settlement, ownership and control of businesses and assets, operating vs. non-operating assets, valuation date, and scope of the assignment. It also discusses the need to analyze financial and non-financial data, understand industry trends, value both operating and non-operating assets, and consider applicable discounts or premiums. Finally, it outlines various valuation approaches and methodologies that may be used to value businesses and assets, as well as regulatory valuation requirements.
The document provides an overview of valuation concepts, principles, standards and processes. It defines key terms related to valuation such as standard of value, premise of value, fair market value. It discusses valuation approaches like market, income and cost approach and methods under them such as comparable companies method. It summarizes the Indian Valuation Standards for valuations in India.
This document provides a summary of Vishal Kapoor's project report on reporting intangible assets. It acknowledges those who assisted with the project and provides a table of contents that outlines sections on the introduction to intangible assets, reasons for measuring intangibles, a case study on Rolta India measuring brand value and human resource valuation, difficulties in reporting intangibles, and conclusions. The introduction defines intangible assets and explains why more companies are finding value in intangible rather than physical assets.
The document discusses an agenda for a valuation training session. It covers an overview of valuation including the meaning of valuation, reasons for valuation, history of business valuation in India, guiding principles, valuation methodologies, and skills required. It also discusses valuation of securities and financial assets, new regulations, and the valuation process. Key points covered include the income, asset, and market approaches to valuation as well as guidance under international valuation standards.
This document provides an overview and history of valuation in India under different regulatory statutes. It discusses the valuation of companies for mergers and acquisitions, preferential allotment, and other transactions under the Companies Act, SEBI regulations, RBI guidelines, and Income Tax laws. The key valuation approaches discussed are income, asset, and market approaches. It outlines the emerging opportunities for registered valuers in India and changes expected with the implementation of new valuation standards and IndAS.
Chapter C.1 - UN TP Manual: Legal Environment for Establishing TP RegimesDVSResearchFoundatio
This document summarizes key aspects of updating transfer pricing regimes based on Chapter C.1 of the UN TP Manual. It discusses the general legal environment for transfer pricing, including an overview of extant TP rules in countries and specific domestic TP rules. Regarding updates, it emphasizes the importance of gathering information through regional cooperation, engagement with international organizations, and participation in capacity building initiatives to regularly evaluate and improve domestic TP legislation.
This document discusses accounting for intangible assets and brands. It defines intangible assets and notes their importance, comprising 80% of company value on average. Common intangible assets include patents, copyrights, franchises, trademarks and goodwill. Intangible assets must be identified, costs measured and collected, amortized over their useful life, and reflected on financial statements. Brands are also considered intangible strategic assets that create goodwill and market share. Brand accounting requires collection and allocation of brand creation costs, valuation of the brand, and amortization of brand costs on financial statements. Valuation methods for brands include cost, market and income approaches.
The document discusses regulatory valuation requirements in India for various transactions under different laws. It outlines how valuation is required for fresh issues of shares, transfer of shares, business combinations/schemes of arrangement, employee stock ownership plans, and insolvency proceedings. It also covers the emerging opportunities for registered valuers in India with the new Companies (Registered Valuers and Valuation) Rules, 2017 which regulate the valuation profession. Key points include the qualification and experience requirements to become a registered valuer for different asset classes like land/buildings, plant/machinery, and financial assets.
Key Takeaways:
- Issues in Comparability Analysis and Handling Information Deficiencies
- Losses and Allocation of Covid-19 Specific Costs
- Factoring Government Assistance
- Solutions for Advance Pricing Agreements under Negotiation
Way Forward
The document summarizes key aspects of mergers and acquisitions under the Companies Act 2013 in India. It discusses various tools of restructuring like merger, amalgamation, demerger, acquisition of shares. It provides details of the regulatory framework, approval process, benefits and motives. It specifically explains provisions for fast track mergers, cross border mergers, and single window clearance which allows related proposals to be considered together with a scheme.
The document discusses accounting standards for long-lived assets, including intangible assets. It notes that intangible assets are nonphysical assets that provide future economic benefits. The standard provides guidance on recognizing, measuring, and disclosing intangangible assets. It also discusses impairment testing of intangible assets to ensure they are carried at recoverable amounts. The standard applies to identifiable intangible assets and goodwill, but not to internally generated goodwill or brands.
The document concludes by noting that while IP valuation is complex, it is an important factor in a business's success, and there are professional services that can assist with the valuation process.
The document provides an overview of accounting for intangible assets under IAS 38. It discusses the definition of intangible assets, recognition criteria, measurement at cost or fair value, amortization of intangible assets with finite useful lives, impairment testing, and disclosure requirements. The document also covers topics such as government grants, internally generated intangible assets, revaluation model, and differences between IFRS and Indian GAAP treatment of intangible assets.
The inaugural edition of our accounting and financial reporting guide, Consolidation and equity method of accounting, addresses the accounting for consolidation matters under U.S. GAAP reflecting the latest standards. The guide discusses the consolidation framework and equity method of accounting, providing specific guidance and examples related to various topics such as:
The consolidation framework
Variable interest entities (VIEs)
Voting interest entities (VOEs)
Equity method investments
Joint ventures (JVs)
Intercompany transactions
The document discusses various topics related to managing financial resources for an organization. It covers elements of cost for a business including material, labor, and overhead costs. It also discusses information required to manage financial resources such as labor costs, material costs, overhead costs, and revenue. Regulatory requirements and accountability to stakeholders are important considerations when managing financial resources. Budgetary control is a key method used by Royal Dutch Shell PLC to manage its finances.
International accounting regulation by the united nations a accounting2010
The document discusses international efforts by the United Nations to regulate accounting standards for transnational corporations since the 1970s. It analyzes these efforts through the political power framework of Robert Dahl. A majority of UN member nations sought to impose binding accounting regulations on TNCs via the UN, while a small minority of developed nations resisted increased regulation and supported corporate interests. Despite intensive negotiations over 18 years, the change-seeking nations did not succeed in implementing their reform agenda, with the minority status quo defenders prevailing instead. The document aims to explain this paradox by analyzing the decision-making process and behaviors of participants using Dahl's pluralist power model focused on observable conflicts, behaviors, and outcomes.
Robert Kwiatkowski, Warsaw Stock Exchange @ TMT.Startups'10 WarsawEwa Stepien
Presentation of Robert Kwiatkowski, Deputy Director of Market Development Department at the Warsaw Stock Exchange presented at the TMT.Startups'10 Warsaw conference on September 15th, Warsaw, Poland.
Brennan, Niamh and Connell, Brenda [2000] Intellectual Capital: Current Issue...Prof Niamh M. Brennan
Substantial differences between company book values and market values indicate the presence of assets not recognised and measured in company balance sheets. Intellectual capital assets account for a substantial proportion of this discrepancy. At present, companies are not required to report on intellectual capital assets which leaves the traditional accounting system ineffective for measuring the true impact of such intangibles.
Regulations currently in place are analysed in this paper. Prior research concerning intellectual capital is next presented. Frameworks for intellectual capital are compared. Indicators used for the measurement of intellectual capital are examined. The research methodologies employed for collecting information about the use of intellectual capital accounts in companies are reviewed.
Guidelines available to companies for reporting on intellectual capital are considered and also the efforts made towards developing an accounting standard for intellectual capital. Finally, current issues and policy implications of accounting for intellectual capital in the future are examined.
Comparative analysis of fair value and historical cost accounting on reported...Alexander Decker
This document summarizes a research study that examined the effects of fair value accounting and historical cost accounting on reported profits of selected manufacturing companies in Nigeria. The study found that both accounting methods have a significant effect on reported profits. Specifically, it was found that the amounts calculated for depreciation, taxes charged, and dividends paid greatly influence reported operating profits. The study concluded that the accounting method used to measure profit will significantly impact taxes, depreciation, and dividend amounts. It recommended that companies prepare financial reports using both historical cost and fair value accounting simultaneously to better understand their true financial position.
This document provides an overview of intellectual capital reporting in Europe. It discusses efforts in Europe to develop guidelines for reporting on intangible assets and knowledge resources, which are important drivers of organizational performance but often not captured in traditional financial reporting. Two major reporting frameworks discussed are the MERITUM guidelines from Europe, which classify intangibles into human, organizational, and customer capital, and the Danish guidelines, which emphasize the dynamic interactions and narratives around knowledge resources. The document also outlines what types of intellectual resources and indicators companies could potentially report on to provide insight into their knowledge assets and management challenges.
The document summarizes William Beaver's perspectives on major areas of capital markets research over the past ten years. It discusses five key areas: market efficiency, Feltham-Ohlson modeling, value relevance, analysts' behavior, and discretionary behavior. Regarding market efficiency, it notes that recent studies have found evidence of market inefficiency in areas like post-earnings announcement drift and market-to-book ratios. It also discusses links between market efficiency and analysts' behavior in processing accounting information.
Meeting or Beating Analyst Expectations in thePost-Scandals .docxLaticiaGrissomzz
This document summarizes a study that investigates changes in the stock market's reaction to companies meeting or beating analyst expectations, and changes in companies' reliance on earnings management and expectations management, following major accounting scandals in the early 2000s. The study finds that the stock market no longer rewards companies for meeting expectations by small amounts, and rewards are smaller for beating by larger amounts. It also finds companies are less likely to rely on earnings management to meet targets, but more likely to manage expectations downward. Overall, meeting expectations has become a stronger signal of future performance since reliance on earnings management has decreased.
Earnings management involves using accounting techniques to alter financial results within GAAP, while fraud intentionally misleads through financial statements in violation of law. While the two can be similar in distorting financial reports, earnings management does not necessarily constitute fraud if performed within the boundaries of accepted accounting standards. However, abusive earnings management could lead firms into committing accounting fraud.
Luận Văn The Influence the Quality of Financial Reporting on Firm Value. The object of research in this study is the quality of financial reporting and corporate value. The focus of research is directed to the quality of financial reporting both weaknesses and advantages in increasing the value of the company. The research method used in this research is explanatory research (expalanatory reserach), because it is a research that explains the causal relationship between variables (Cooper and Schindler, 2006: 154) through census research.
Banks appear to have incentives for manipulating provisions estimate. Banks use loan loss provisions to smooth income, manage regulatory capital and to signal private information to investors. Empirical evidence in banking research report mixed conclusion as to whether regulation (IFRS or Basel) hinders or encourages this behaviour. This paper provide evidence that, the presence of regulation, motivates banks to smooth income possibly as a preferred earnings management technique. The findings of this paper are relevant
to current concerns of accounting standard setters and bank regulators on the current model of loan loss provisioning.
The study examined the effect of fair value accounting on predictive power of earnings of listed Deposit Money banks (DMBs) in Nigeria. Fair value accounting has been a subject of serious concern in corporate finance and accounting literature following the adoption of International Financial Reporting standards. Data were collected from all the fifteen DMBs listed on the Nigerian stock exchange between 1st January 2011 and 31st December 2015. In analyzing the collected data, the study adopted descriptive statistics, correlation analysis and a panel multiple regression analysis to identify the possible effects of fair value accounting on predictive power of earnings. The results revealed that fair value accounting significantly enhances earnings predictability. The results further established that where as fair value hierarchy level one does not significantly enhance earnings predictability of listed DMBs in Nigeria, level two and three was found to be negatively and significantly influencing earnings predictability. This implies that level two and three significantly reduces earnings predictability of listed DMBs in Nigeria. Therefore, it is recommended that Financial Reporting Council of Nigeria should develop valuation guidelines that must be followed enhance reliability of fair value measurement in Nigeria.
Risk management in banks is a crucial issue mainly in Islamic banks. This study seeks to examine the impact of the incomes of mudharaba and musharaka on the relationship between risk and performance, which is measured by ROAA. This study employs unbalanced panel data regression analysis of Ordinary Least Squares method, from 16 Islamic banks from different countries over the period 2012 to 2015, which was processed by the software stata13. The results show that the income of Sharing of Losses and Profits (PLS) products (mudharaba and musharaka) has a moderating effect particularly on the relationships between performance and liquidity risk, and operational risk. However, it has no moderating effect on the relationship between performance and market risk. This study helps to enrich the literature with new models that can help bankers and Islamic finance students to get ideas and make relevant decisions in terms of investment.
This document summarizes a research paper on financial risk disclosure in annual reports of listed Greek companies. The paper aims to examine the relationship between risk disclosure practices and firms' financial characteristics. It reviews prior literature on risk reporting and regulations. It develops four hypotheses: 1) A positive relationship exists between firm size and risk disclosure level. 2) The relationship between risk level and disclosure is uncertain. 3) No difference exists in disclosure of good vs. bad risks. 4) Disclosure focuses more on past/present rather than future risks. The study will analyze risk reporting in annual reports of Greece's 20 largest firms using content analysis.
Earnings and stock returns models evidence from jordanAlexander Decker
This document summarizes a study on the relationship between earnings and stock returns in Jordan. It examines three models - price, return, and differenced - to analyze the association between accounting measures like earnings per share and stock price changes. The results show a positive and significant relationship between earnings and stock prices/returns in all three models. However, the forecasting ability is lower for the return and differenced models compared to the price model. The study recommends improving the return-earnings relationship by aggregating data over a longer period.
This document summarizes a paper on non-quantitative measures for evaluating companies. It discusses:
1) Criticism of accounting information used for evaluations and limitations of popular valuation methods like discounted cash flow.
2) Identification of "value drivers" or non-financial factors that impact company value, including human capital, customer loyalty, and business relationships.
3) Emphasis on the important role that human factors like workforce, organization, and loyalty play in company valuation beyond just financial metrics.
Value relevance of earnings and cash flows during the global financial crisiSample Assignment
This study examines the value relevance of earnings and cash flows from operations (CFO) during and before the 2008-2009 global financial crisis (GFC) using Australian firms. It finds that CFO provides incremental value relevance beyond book value and earnings. During the pre-crisis period, earnings has greater relative and incremental value relevance than CFO in explaining share prices. However, the value relevance of earnings increased while that of CFO decreased during the GFC compared to the pre-crisis period, suggesting earnings is a more superior measure of firm performance during an economic downturn like the GFC.
Creative Accounting and Impact on Management Decision MakingWaqas Tariq
The study was conducted to appraise the impact of creative accounting on management decisions of selected companies listed in the Nigerian Stock Exchange. With the background, the main objective of the study includes the examination of the extent to which macro-manipulation of financial statement affects management decisions; to examine the extent to which macro-manipulation of financial statement affects share price performance; and to determine the impact of misreported assets and liabilities as well as making recommendations to help remedy some of the problems. The research method used was descriptive and the primary data collected were summarized and tabulated. These were picked in line with the hypothesis variables of the study so as to determine their validity. It was observed that the application of creativity in financial statement reporting significantly affects the decision of management to recapitalize the firm upward or dispose of it reserves. The study concluded that creative accounting through macro-manipulation of financial statements affects a firm’s price and capital market performance. In view of the study, the researcher recommended that the application of creative accounting on management decision should be to avoid misreporting of assets and liabilities in their financial report, and that management decision towards creative accounting should be geared towards the relative advantage principle and good corporate governance which encourage challenges to current ways of thinking and not manipulating for self interest.
Revaluation accounting and decision usefulness of accounting ratiosAlexander Decker
This document discusses the limitations of using historical cost accounting and ratio analysis based on historical cost data. It argues that historical cost accounting does not reflect the current value of assets, which distorts key financial ratios used for decision making.
The document proposes that revaluation accounting, which adjusts fixed asset values to current market values, can address these limitations by providing more relevant information to ratio analysis. It reviews theories supporting revaluation accounting and identifies several key ratios impacted by historical cost distortions, such as return on capital employed.
The study examined the relationship between asset valuation methods and the usefulness of financial statements and ratios for decision making. It found that adjusting statements for revalued assets enhances ratio analysis and decision usefulness for information users.
Ibiamke a. 50 years of efficient market hypothesisNicholas Adzor
This document summarizes the benefits and challenges of the Efficient Market Hypothesis (EMH) for accounting research and practice over the past 50 years. Some key benefits identified include influencing the development of accounting standards, providing a framework for capital market research, and its use in client advising and legal cases. However, challenges are also discussed, such as EMH shifting the focus from historical to forward-looking information, which is less reliable and can encourage fraudulent reporting. While EMH has advanced accounting in several ways, it also threatens the profession by questioning the need for rigorous accounting principles and controls.
Ajekwe & ibiamke 2017 the association between audit quality and earnings ...Nicholas Adzor
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Factors explaining the innefficient valuation of intangibles
1. Inefficient
valuation of
intangibles
57
Accounting, Auditing &
Accountability Journal
Vol. 16 No. 1, 2003
pp. 57-69
# MCB UP Limited
0951-3574
DOI 10.1108/09513570310464282
Received June 2002
Revised July 2002
Accepted November
2002
Factors explaining the
inefficient valuation of
intangibles
Manuel GarcõÂa-Ayuso
Department of Accounting, University of Seville, Seville, Spain
Keywords Intangible assets, Valuations, Financial analysts, Financial forecasting, Ethics
Abstract The inefficient valuation of the intangible determinants of the financial position of
business companies may result in significant damages for both firms and their stakeholders.
Based on the empirical literature in accounting and finance, this paper suggests possible reasons
for the inefficient valuation of intangibles, provides explanations for the existence of biases in
analysts' earnings forecasts and proposes alternative ways for the improvement of the resource
allocation mechanisms in the capital markets.
1. Introduction
In recent years, a number of capital markets-based empirical studies have
assessed the extent to which the value relevance[1] of accounting information
has changed over time, finding contradictory results. Whereas the pioneering
studies documented a decline in the degree of association between stock
returns and earnings and between stock prices and both earnings and book
values in US capital markets (Collins et al., 1997; Francis and Schipper, 1999;
Lev and Zarowin, 1999), recent evidence suggests that empirical results are
dependent on the method used (Chang, 1998) and that, once the bias in the
coefficient of scale is adjusted for, there is no significant decrease in the value
relevance of accounting numbers in time (Brown et al., 1998). Moreover, Ely
and Waymire (1998) have shown that the explanatory power of earnings and
book values for prices was not significantly different in the USA in the pre-
SEC era.
This notwithstanding, it seems to be widely accepted nowadays that
accounting information is losing relevance, among other reasons, due to the
increasing importance of intangibles not recognized as assets under current
accounting standards (Wallman, 1995; Lev and Zarowin, 1999). Many
consider this as the main force driving the growing difference between the
market value of companies and their book value equity (Lev, 2001), as,
although intangible investments increase future earnings and cash flows,
they are generally expensed, thus understating current earnings and book
values.
However, it is not reasonable to state that the difference between the market
value of the firm and its book value of equity is entirely due to the existence of
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The author gratefully acknowledges the funding provided by the Spanish Association of
Accounting and Business Administration to the Carlos Cubillo Chair in Accounting and
Auditing, as well as the financial aid of the Spanish Ministry of Education (Project PB98-0415).
2. AAAJ
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intangibles not reflected by the accounting model. First, the book value of
equity may be negatively biased not only due to the lack of recognition of
intangibles, but also because of the undervaluation of tangible and financial
assets. Second, shareholders' equity may not reflect the existence of intangible
liabilities that are likely to be discounted in stock prices but not accounted for
even under GAAP prudent accounting. Third, stock prices may not always be
considered as unbiased estimates of the value of companies. There is an
overwhelming amount of empirical research documenting the existence of
market anomalies[2] such as the size (Banz, 1981), January (Rozeff and Kinney,
1976), E/P (Basu, 1977) and B/M (Fama and French, 1992) effects, and
the underreaction (Ou and Penman, 1998) or overreaction to earnings
announcements followed by a post-announcement drift (Bernard and Thomas,
1990)[3].
The significant increase in the stock prices of the so-called new economy
firms during the late 1990s and the subsequent burst of the technological
bubble have resulted in enormous losses for investors and dramatic job slashes.
The question many are posing is whether we could have anticipated the
inefficient valuation of these (presumably intangible-intensive) companies and
to what extent the damages could have been avoided.
In the light of the results reported by recent empirical research in accounting
and finance, this paper identifies the causes of the inefficient valuation of
intangibles in capital markets, discusses the existence of, and the reasons for,
biases in analysts' earnings forecasts, describes some recent efforts undertaken
in order to overcome the problems limiting the efficiency of the resource
allocation mechanisms in financial markets and suggests ways for the
improvement of the resource allocation mechanisms in the capital markets.
The next section discusses the problems arising as a result of the inefficient
valuation of intangibles in capital markets. Section three delves into the causes
of those problems, while section four suggests possible solutions and section
five concludes.
2. The problems
The inefficient valuation of intangibles has significant implications for firms
and their stakeholders. Among the damages that have been thoroughly
discussed in the accounting and financial literature are the following:
Stock price volatility arises as a result of the difficulty to accurately estimate
the future payoffs and the risk associated with the investment in intangible-
intensive companies.
The uncertainty regarding the financial position of intangible-intensive
companies increases bid-ask spreads (Boone and Raman, 1999) and raises the
cost of capital (Botosan, 1997; Sengupta, 1998), resulting also in higher interest
rates (Shi, 1999). Information asymmetry increases the opportunities for insider
gains (Aboody and Lev, 2000) causing significant losses for small investors[4].
The overstatement of the value of companies in the capital markets results
in significant losses for investors when stock prices revert to their fundamental
3. Inefficient
valuation of
intangibles
59
values. Conversely, undervaluation reduces the ability of the firm to raise
additional capital (Chan et al., 1998; Lev et al., 2000) and increases the risk of
hostile takeovers. This is closely related to the dramatic social and economic
impact of the enormous job slashes resulting from the initial overvaluation of
high-tech companies and the subsequent crash of the stock market.
The last few years have witnessed a growing amount of litigation between
investors and managers as the former find it difficult to evaluate the firm's
performance based on accounting numbers (Lev, 2001). This may be partly due
to managers' propensity to manipulate earnings with intangible investments
(Bushee, 1998) and to cut down R&D before going public in order to increase
earnings and influence investors' expectations (Darrough and Rangan, 2001).
Obviously, all these problems are more likely to appear in growing
companies undertaking important intangible investments to increase their
market share than in mature firms having reached a steady state in which
intangible investments are close to the annual depreciation of both their
recorded and unrecorded intangible assets.
3. The causes
3.1. Quality of financial information
The inefficient valuation of intangibles could stem from the lack of relevant
information in the annual reports of business companies. Based on a survey of
business-reporting practices by US companies, the FASB's Steering Committee
(FASB, 2000) concluded that companies are currently disclosing a large amount
of voluntary useful information on their financial position, although there is a
``general lack of meaningful and useful disclosures about intangible assets''.
The remainder of this section discusses some possible reasons for the
decreasing usefulness that accounting information is experiencing according to
both researchers and practitioners.
Accounting conservatism limits the recognition of intangible investments
as assets in the balance-sheet to those whose cost may be reliably measured,
which are separable from the rest of the assets of the firm and yield future
benefits that are in control of the company. Therefore, firms investing large
amounts in intangibles will report lower book values and will be significantly
affected by the immediate recognition of the costs and the delayed recognition
of the benefits in accounting earnings, particularly if they are small and have
a record of reported losses (Ryan and Zarowin, 2001). In general, managers
fail to satisfy the informational needs of the users of corporate financial
reports because they do not disclose the information that investors and
creditors consider most relevant (PriceWaterhouseCoopers, 2002). This could
be due to the existence of benefits for managers, auditors and leading
financial analysts from the lack of publicly available information on
intangibles (Lev, 2001, p. 87).
Corporate financial reports do not provide investors with an accurate view of
the value creation process within the firm. Specifically, there is a lack of
financial and non-financial information on the firms' value drivers (Amir and
4. AAAJ
16,1
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Lev, 1996; Ittner and Larcker, 1998). Also, there appears to be a lack of relevant
information on management's prospects for the future financial position of the
firm. This view is consistent with the claims of the AICPA (1994) for more
forward-looking information in the management report and the suggestion of
the former board of the IASB that firms should be encouraged to disclose more
narrative information on their intangibles[5].
In sum, there appears to be a growing concern for the lack of usefulness of
accounting statements due to the conservatism of accounting regulation and
the absence of historical and prospective financial and non-financial
information on the intangible determinants of the value of companies.
3.2. Market imperfections
Inefficient valuations may also be the consequence of the inexistence of
markets for intangibles and the imperfections in capital markets. Since there
are no markets for intangibles, their value may not be assessed on the basis of a
consensus as is the case with commodities or other tangible and financial
assets. Moreover, there are no widely accepted valuation models for intangible
assets such as those developed for stocks, bonds or options.
Market imperfections giving rise to information asymmetry allow insider
gains and have negative economic consequences for smaller investors and
stakeholders that do not have the capability to influence management's
decisions because of their small share in the capital of the firm, due to the
incomplete nature of the contracts upon which corporate governance
mechanisms are based or because of their small bargaining power.
The audit function fails to guarantee the necessary transparency in financial
markets and to ensure the disclosure of all the information that is relevant to
understand the financial position of the firm. Furthermore, there are problems
affecting the timeliness in the announcement of the relevant events and the
financial information required by stakeholders.
The lack of international harmonization of accounting standards and
financial markets' regulatory frameworks is also seen by many as the cause of
inefficiencies in the resource allocation mechanisms.
In sum, market imperfections may result in inefficiencies that are likely to
cause greater damage to smaller stakeholders and may only be corrected if
financial markets' regulations are improved and international harmonization is
achieved.
3.3. Limited capability of financial analysts?[6]
Financial analysts are sophisticated users of accounting information. The
strong competition in the financial markets forces them to exploit all available
knowledge to provide their customers with the most efficient financial
advising services. In order to survive in their competitive environment,
analysts need to have not only the ability to access all value-relevant
information in a timely fashion, but also the capability to understand and
exploit its content. Their capability to predict future earnings accurately has
5. Inefficient
valuation of
intangibles
61
been extensively documented in the accounting literature (Brown and Rozeff,
1978; Affleck-Graves et al., 1990; Richardson et al., 1999). In fact most
contemporary research studies use analysts' forecasts as a surrogate for the
market's expectations (Liu and Thomas, 2000).
Credibility is another fundamental requisite for financial services companies
in markets nowadays and, consequently, significant or systematic errors in buy
or sell recommendations are likely to undermine the confidence of their
customers and, eventually, result in the loss of a significant part of their
revenues. The results of Mikhail et al. (1999) show that analyst turnover is
greater, the lower their forecast accuracy.
However, there may be significant differences across analysts in the ability
to access relevant and timely information, as well as in their capability to
extract all its value-relevant content to make accurate predictions. Differences
in the ability of market participants to exploit the information content of the
earnings numbers disclosed by companies may explain the existence of over-
and under-reaction to earnings announcements followed by a subsequent
drift in stock prices. If a small subset of market participants are able to
exploit all the value-relevant information conveyed by the earnings figure
disclosed at a given moment, but the rest of the investors fail to fully
understand the impact of current information on the present value of the
future cash flows of the firm, there will be an initial stock price reaction that
does not completely reflect all value-relevant information. Once the leading
investors have adjusted their expectations and reacted accordingly, the rest
of the market participants will slowly move in the direction signalled by the
leading steers and, consequently, prices will show a drift towards the intrinsic
value of the stock.
Analysts' earnings forecasts have become widely used by investors as a
basis for the design of their portfolios and investment strategies. Biases in
earnings forecasts may result in an inefficient valuation of companies. There
are in the empirical literature a large number of studies documenting the
existence of a systematic positive difference between analysts' earnings
forecasts and the actual earnings numbers[7], which appears to be greater for
smaller companies, is not dependent on the data sources used by the
researcher, and is also present in the case of long horizon growth forecasts
(LaPorta, 1996).
Cognitive biases and analysts' incentives are the two main economic
determinants of forecast biases that have been analyzed by empirical studies.
The potential sources of cognitive biases are related to the anomalous
behaviour of stock markets. DeBondt and Thaler (1985) spawned a stream of
research based on the hypothesis that analysts systematically overreact to the
information (either good or bad) conveyed in earnings. Although the evidence
on overreaction to good news in earnings appears to be consistent, Easterwood
and Nutt (1999) have shown that analysts underreact to bad news. However,
Abarbanell and Lehavy (2000a) have concluded that biases in earnings
forecasts may not be explained by cognitive biases.
6. AAAJ
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Inefficient forecasts could be due to the intense competition between and
within firms that forces analysts to strive for their customers' capital to the
detriment of the rigour in their methods. As shown by Welch (2000), the
recommendations issued by the leading analysts are immediately followed by
the rest (presumably less capable), thus resulting in poorer aggregate
information. Moreover, Cooper et al. (2001) have found that the forecasts of the
leading analysts have a greater impact on stock prices. Taken together, the
findings of these studies suggest that competition among analysts results in
herding behaviour that significantly affects stock prices. Related to this are the
time constraints facing financial analysts, which may lead them to prefer
technical analysis or cheap fundamental analysis, i.e. stock screening (Penman,
2001) instead of a deep fundamental analysis using valuation techniques that
assess the intrinsic value of companies based on estimates of future payoffs
and risk. Although contrary investment strategies aimed at exploiting market
inefficiencies may yield positive abnormal returns, they may also result in
significant losses if the analyst fails to accurately estimate the future payoffs
and the risk associated with the investment and other analysts are able to draw
more efficient estimates of the intrinsic value of the stock.
Functional fixation is another possible source of inefficient earnings
estimates and firm valuations. Analysts may not be able to incorporate
information on intangibles as inputs in their decision processes if the dominant
culture in their investment firms suggests it is not acceptable. Moreover,
analysts may not consider the information voluntarily disclosed by managers
as reliable. Finally, they may fear that investors will not consider information
on intangibles as a consistent basis to sustain their investment decision
(Johanson, 2002).
Despite the substantial amount of evidence of systematic biases in analysts'
forecasts, the results of recent studies suggest that the magnitude of the bias is
decreasing in time (Brown, 1997, 1998)[8]. In fact, Richardson et al. (1999) have
found that the optimism in earnings forecasts has recently turned into
pessimism. Three reasons may explain this change in the pattern documented
by previous studies: analysts are learning from past errors and face negative
consequences when their forecast accuracy is systematically low (Mikhail et al.,
1997); their incentives have changed and, the quality of the data used by
empirical studies of analysts' forecasts has improved significantly in the last
few years (Abarbanell and Lehavy, 2000b); the observed biases could be the
consequence of earnings management practices intended to report earnings
numbers that slightly beat analysts' forecasts[9].
Amir et al. (1999) have documented that, on average, the information
provided by financial analysts to investors represents a modest contribution
beyond that conveyed by financial statements (12 per cent in adjusted R2
terms), suggesting that analysts mainly react to the observed changes in stock
prices rather than cause them. However, they conclude that the use of the
information provided by analysts in their forecasts mitigates the decrease in
the value relevance of financial statements. The contribution of financial
7. Inefficient
valuation of
intangibles
63
analysts appears to be greater in high-tech industries and, particularly, for
companies with large investments in R&D. Taken together, their results
suggest that financial analysts are capable of understanding the value
implications of intangibles and provide forecasts and recommendations that
are useful to investors.
3.4. Ethics
We have recently witnessed lamentable events in the capital markets that
have caused huge economic losses to investors and have undermined the
confidence of investors in the financial markets. They have all been the
consequence of the unethical behaviour of managers, auditors and financial
analysts.
Inefficient valuations may be caused by misleading management practices
such as the disclosure of false information in conference calls or the
manipulation of accounting numbers. Darrough and Rangan (2001) have
shown that managers tend to reduce their R&D investments to increase
earnings in the year of the initial public offering to improve investors'
expectations and Bushee (1998) has also found evidence that firms may
manage their earnings using R&D[10].
The main role of auditors is to reduce the information asymmetry between
investors and managers. Audit firms providing consulting services to their
clients may be tempted to hide their qualifications as long as it maintains and
increases their customer portfolio. Based on the resulting unreliable
information, investors are likely to overestimate the value of firms and,
subsequently, incur losses when the private information becomes public and
stock prices are adjusted downwards.
Investors may also suffer damages if analysts' behaviour is not ethical.
Biased forecasts will lead investors to allocate resources to overvalued assets
whose price will eventually revert to their fundamental value (Lee et al., 1999).
Besides cognitive limitations, earnings forecast optimism may be driven by the
incentives of financial analysts. An optimistic bias in earnings forecasts issued
by sell-side financial analysts is likely to result in an increase in the
compensation they receive for their services in equity issues, mergers and
acquisitions (Lin and McNichols, 1998). On the other hand, analysts working
for investment banks appear to be more likely to issue optimistic forecasts in
the case of companies to which the bank provides financial services (Michaely
and Womack, 1999). However, it could also be the case that firms choose the
provider of financial services whose analysts issue the most optimistic
earnings forecasts, in the belief that the amount of capital raised in the public
offerings would be greater. Optimistic forecasts may also be a way to improve
analysts' access to corporate information. For issuing positively biased
earnings estimates is likely to improve the relationships between the analyst
and the firm's management, allowing the first to access relevant information
that could be particularly beneficial in the case of significant information
asymmetries.
8. AAAJ
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4. Possible solutions
Changes in the regulation are needed in order to improve the market
imperfections that result in economic damages for firms and their stakeholders.
It is necessary to promote efforts aimed at suppressing the arbitrage
opportunities that arise from the differences in the market regulations across
countries. The coordination and integration of financial markets will surely
have positive consequences in this respect.
But, most important, the current accounting model must be improved, issuing
new standards to ensure the disclosure of a greater amount of higher quality
information on the intangible determinants of the value of companies. It is also
necessary to encourage voluntary disclosures including forward-looking
information by management. Managers must use a language that financial
analysts and investors are able to understand. They have to provide explanations
of the value creation process in the firm and make clear links between intangible
investments and future value creation. This will increase the transparency and
reduce the asymmetry limiting the efficiency of capital markets.
The conservative perspective on the recognition of intangible
investments in the balance-sheet adopted by the IASB in IAS 38 (IASC,
1998) will have to be revised in the future because of the new developments
in the accounting standard-setting process in the USA. The FASB has
decided to allow the no amortization of goodwill and prescribe the disclosure
of more information on R&D investments in SFAS 141 and 142. As a result,
fair valuation of tangible and intangible assets becomes a fundamental tool
for managers to provide stakeholders with relevant information on the
financial position of the firm.
The elaboration and implementation of codes of good governance are a
necessary step towards enhancing the credibility of that information. Codes of
ethics in audit and investment firms are also necessary to ensure that audit
reports and analysts' recommendations are considered by investors as reliable
inputs for their investment decision processes. But that is not enough.
Regulatory bodies must enforce controls to ensure that all market participants
respect their provisions and should impose severe sanctions on those who
violate them and cause damage to the system.
However, we must always be aware that managers, auditors and analysts
may have no incentives to trigger changes in the current state of things[11].
5. Concluding remarks
The inefficient valuation of intangibles has significant negative economic and
social consequences in our economies. High growth rates in GDPs, low interest
rates and excessively optimistic expectations on the potential for future wealth
creation of the so-called new economy businesses have resulted in the
overvaluation of a number of intangible-intensive firms in the capital markets.
Inefficient valuations may be the consequence of low quality financial
information, market imperfections, the insufficient capability of managers,
auditors and analysts or their unethical behaviour.
9. Inefficient
valuation of
intangibles
65
In recent years, some studies conducted by academics, professional
organizations and standard-setting bodies have suggested that the quality
(usefulness) of accounting information is decreasing and that the users of financial
statements need more forward-looking financial and non-financial information,
particularly on the intangible determinants of the value of companies.
To avoid the inefficient valuation of intangibles in capital markets standard-
setting bodies must improve current accounting regulation so as to ensure the
full disclosure of relevant information on intangibles, increase the transparency
and reduce the asymmetry limiting the efficiency of capital markets. Moreover,
managers should provide more narrative information using a language that
stakeholders and analysts are able to understand, that is, providing a clear
picture of the value creation process within the firm and explanations of the
contribution of intangible investments. Guidelines for the measurement and
voluntary disclosure of relevant information on the intangible determinants of
the value of companies may be useful in this regard[12].
Although published empirical literature suggests that analysts' forecasts are
systematically biased, recent studies lead us to believe that forecast errors are
not caused by cognitive biases and that analysts actually provide investors
with relevant information beyond that contained in financial statements,
particularly in the case of intangible-intensive companies. Two consequences
may be drawn from these findings: first, analysts seem to be able to obtain
information on intangibles from sources other than the financial statements;
second, the inefficient valuation of intangibles may not be explained by the lack
of ability of analysts to understand the contribution of intangibles to the value
creation process within the firm.
Rather, research points to the unethical behaviour of market participants as
the most suitable source of inefficiencies. Because of the lack of publicly
available information on intangibles, the unethical behaviour of managers,
auditors and financial analysts has resulted in an overvaluation of intangible-
intensive companies followed by a subsequent correction in their stock prices
that caused significant losses for uninformed investors. Managers, auditors
and analysts must now undertake efforts aimed at improving their credibility
in the eyes of investors. Codes of good governance and codes of ethics in audit
and financial firms are not sufficient. Market regulatory frameworks and
accounting standards must be improved to ensure the efficient functioning of
capital markets and guarantee that any conduct causing damage to the
financial system is identified and punished.
I agree with Steven Wallman (1995) that we cannot have financial reporting
and disclosure constraints that slow the pace of progress in capital markets,
decrease the rate of reduction in the cost of capital, or limit innovation. The
next step collectively is ours.
Notes
1. In general, an item in the financial statements is considered as relevant if it has the ability
to make a difference to decisions of financial statement users (Barth, 2000). More
10. AAAJ
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66
specifically, an accounting number is value-relevant if it conveys information that has the
power to modify investors' expectations on the future payoffs or the risk associated with a
given resource allocation. In an efficient market all value-relevant information would be
immediately and completely reflected in stock prices.
2. Kothari (2001) provides an extensive review of the empirical accounting literature and its
implications for the efficient markets hypothesis.
3. See Fama (1998) for a thorough discussion and a critical interpretation of the empirical
evidence on market anomalies.
4. Barth et al. (1999) have found that analyst coverage is directly associated with the
existence of intangibles in the firm, as analysts try to exploit the greater information
asymmetries existing for these companies.
5. Although not mentioned, the underlying reason is that voluntary disclosures are expected
to reduce asymmetries, forecasts errors and bid-ask spreads by helping stakeholders
understand the contribution of intangible investments to the value creation process in the
firm.
6. The discussion presented in this section is mainly based on the results of empirical studies
of analysts' earnings forecasts. Case studies based on interviews are only marginally
considered here as they are the focus of Holland (2002).
7. See Kothari (2001) and Brown (1993, 1997) for a thorough discussion of the accuracy of
analysts' earnings forecasts and their possible explanations.
8. Brown (1998) reports that the mean bias has decreased from 2.6 cents per share in 1993 to
0.39 cents in 1997.
9. Bartov et al. (2002) have found that companies beating or meeting analysts' forecasts
experience higher subsequent stock returns.
10. Ely and Waymire (1999) concluded that as early as 1927 (in the pre-SEC era) investors
perceived that managers overstated earnings through earnings capitalization.
11. See Lev (2001) for an interesting discussion of the politics of intangibles disclosures.
12. See www.eu-know.net and www.efs.dk/icaccounts
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