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Asian Review of Accounting

The value relevance and reliability of intangible assets : Evidence from Australia before
and after adopting IFRS
Xu-Dong Ji Wei Lu

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Xu-Dong Ji Wei Lu , (2014),"The value relevance and reliability of intangible assets ", Asian Review of
Accounting, Vol. 22 Iss 3 pp. 182 - 216
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ARA
22,3

The value relevance and


reliability of intangible assets
Evidence from Australia before and
after adopting IFRS

182

Xu-Dong Ji
School of Accounting, Faculty of Business and Law, La Trobe University,
Bundoora, Australia, and
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Wei Lu
Department of Accounting and Finance, Faculty of Business and Economics,
Monash University, Caulfield East, Australia
Abstract
Purpose The purpose of this paper is to examine the value relevance of intangible assets, including
goodwill and other types of intangibles in the pre- and post-adoption periods of International Financial
Reporting Standards (IFRS). Most importantly, this paper investigates whether the value relevance
of reported intangible assets is associated with their value reliability. Furthermore, this paper
reports whether the adoption of IFRS improves the value relevance of intangible assets and alters the
relationship between value relevance and reliability.
Design/methodology/approach Both price and return models based on Ohlosn theory (1995)
are employed to test the value relevance and value reliability of intangibles. Australian-listed firms
with capitalised intangibles from 2001 to 2009 are selected in this study. The sample includes 6,650
firm-year observations.
Findings The main result shows that capitalised intangible assets are value relevant in Australia, in
both the pre- and post-adoption of IFRS periods. Value relevance is higher in firms with more reliable
information on intangible assets. This study finds that the value relevance of intangibles has declined
in the post-adoption period of IFRS. However, the positive relationship between the value relevance
and the reliability of intangibles has remained unchanged in the post-adoption period.
Originality/value The paper contributes a new measurement of value reliability of accounting
information about intangibles. This paper is one of few studies on the relationship between value
relevance and reliability of intangible assets. The results show that value relevance is positively
associated with value reliability. This suggests that, when accounting standard setters assess whether
the existing IFRS of intangibles should be improved in the future, they need to think not only in terms
of whether the standard can provide more relevant information of intangibles to investors but also
whether the standard can make the information of intangibles more reliable.
Keywords Intangible assets, Value relevance, International Financial Reporting Standards (IFRS),
Value reliability
Paper type Research paper

Asian Review of Accounting


Vol. 22 No. 3, 2014
pp. 182-216
r Emerald Group Publishing Limited
1321-7348
DOI 10.1108/ARA-10-2013-0064

1. Introduction
The value relevance of intangibles has been extensively documented in studies over
the last 20 years (for a review see Canibano et al., 2000; Wyatt, 2008). However, the
findings of these studies have had little influence on accounting standards setters. Both
the International Accounting Standards Board (IASB) and the Financial Accounting
Standards Board (FASB) have taken a more conservative and restrictive approach
towards accounting for intangibles. In both IAS 138 Intangible Assets, and FASB
142 Goodwill and Other Intangible Assets, research expenditures and advertising

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expenditures need to be expensed immediately; only externally purchased goodwill


can be capitalised and intangible assets are subjected to an impairment test.
The question here is why is it that accounting standards setters are still taking such
a conservative approach even when they are faced with mounting evidence that:
information about intangible assets is value relevant; and current financial statements
have failed to provide more relevant information to users?
The explanation may lie in accounting standard setters being concerned that
the relevance of accounting information is also affected by the reliability of
such information. It can be argued that the value relevance of intangibles has
been exaggerated by prior researchers due to a failure to consider the reliability of
information about intangibles in their modellings. The value relevance is conditional
on the value reliability[1] of the information about intangible assets (Dahmash et al.,
2009). If it is permissible to disclose less reliable information about intangibles, this will
not improve the value relevance of financial information that firms report but instead
may reduce the value relevance of that information. The signals sent by firms about
the value of their intangibles need to be correctly deciphered and understood by users.
Otherwise signals are merely noises and they, in turn, substantially reduce the value
relevance of intangibles.
The main objective of this paper is to examine whether the value reliability of
information about intangibles can have an influence on its value relevance, and also
whether there are any differences in such influence between the pre- and post-adoption
periods of International Financial Reporting Standards (IFRS). In doing so, this study first
documents the differences in the accounting standards for intangibles used by Australian
firms before and after 2005 when Australia and members of the European Union adopted
IFRS. Capital market participants need to understand the impact of adopting IFRS on
firm values. Australia provides an interesting setting for studying the effects of adopting
IFRS on firms values because it had markedly different accounting standards for
intangibles prior to, and after, the adoption of IFRS. Understanding these differences will
facilitate an understanding of the likely impact of adopting IFRS in other jurisdictions.
The paper then examines the associations between the market value of firm equity
and the book values of their tangible assets minus liabilities, as well as earnings, with
particular emphasis on the links with book values of various types of capitalised
intangible assets. Following this the paper compares the value relevance of intangibles
in two different types of firms:
(1)

firms with more reliable information about intangibles; and

(2)

firms with less reliable information about intangibles, to investigate whether


value relevance is influenced by the value reliability of intangibles.

Finally, the paper compares the value relevance of intangibles in the pre- and
post-adoption period and investigates whether the relationship between value relevance
and value reliability has changed in the post-adoption period.
This paper makes the following contributions to the existing literature on intangible
assets, as well as to the literature on the economic consequences of adopting IFRS.
First, this paper is only one of a few studies to have investigated the impact of the
value reliability of intangible asset information on the value relevance of intangibles.
The general concern of this type of study is how to measure value reliability of intangible
asset information (Wyatt, 2008)[2]. Kallapur and Kwan (2004) tackle this difficult issue by
classifying their sample firms into firms with high contracting incentives vs firms with

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184

low contracting incentives[3]. They argue that capitalisation of brands are more value
relevant for firms with low contracting incentives because it is less likely that these firms
would cook their books. As firms may have incentives other than contracting to capitalise
intangibles, such as to meet earnings targets, or to improve financial structure, we extend
Kallapur and Kwans study by exploring whether there are other factors that can affect
a firms behaviour in reporting capitalised intangibles. Our study attempts to apply a
direct measure of value reliability of reported intangibles the tangibility of a firms
assets. We argue that the tangibility of a firms assets will affect its behaviour in regard
to capitalising intangibles. The information on capitalised intangibles is more reliable
in firms with more tangible assets because these firms have less incentive to inflate
total assets by capitalising intangibles. The paper finds that the value reliability of the
intangible asset information is complementary to its value relevance.
Second, the impact of the adoption of IFRS on the value relevance and the
value reliability of intangibles is assessed in this paper. Our results show that
firms behaviours on capitalising and amortising (impairing) intangible assets are
significantly different between the pre- and post-adoption IFRS periods. The paper
concludes that the adoption of IFRS has a significant impact on the value relevance
of intangibles. In general, the value relevance of intangibles has declined since
the adoption of IFRS. However, intangibles are still more value relevant in firms
where reported intangibles are assumed to be more reliable in the post-adoption
IFRS period.
Finally, using the findings in the paper we try to explain why more stringent
requirements for recognising capitalised intangibles have been introduced in the
IFRS because the IASB and other national accounting standard setters have become
more concerned with the reliability of information about intangibles. Regulators want
to prevent less reliable information about intangibles being recognised and disclosed
in a financial statement because this kind of information may mislead users. Noisier
financial information is harmful rather than helpful to users who want to make rational
economic decisions.
The remainder of this paper is organised as follows. Section 2 discusses prior studies on
intangibles. The changes in accounting requirements in Australia for intangibles during
the pre- and post-adoption periods are outlined in Section 3. The research methodology and
hypotheses are dealt with in Section 4. Sample selection and analysis of the results are
discussed in Section 5 and finally, the conclusion is drawn in Section 6.
2. Literature review
2.1 Are intangibles value relevant?
During the past 20 years, accounting academics have strongly advocated recognising
intangibles in financial statements. They have provided much evidence in their studies
to show that intangibles are value relevant (McCarthy and Schneider, 1996; Francis and
Schipper, 1999; Lev and Zarowin, 1999; Goodwin and Ahmed, 2006) and that there
exists a statistically significant association or link between firms market value and
information about the value of intangibles.
Lev and Sougiannis (1996) investigate the value relevance of research and
development (R&D) expenses. By estimating amounts that would be capitalised
according to the historical success of R&D, they find that notional capitalisation of
R&D is strongly associated with stock prices and returns. Their findings indicate
that the R&D capitalisation process yields value relevant information for investors.
They challenge the assertion made in the SFAS No. 2 that the absence of a relationship

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between R&D expenditures and subsequent benefits is a major reason for requiring
the full expensing of R&D.
While not directly addressing the value relevance issue, Boone and Raman (2001)
examine the association between market liquidity and off-balance sheet R&D assets
(expensed R&D). Their study states that where R&D are expensed as incurred,
R&D-intensive firms have relatively high bid-ask spreads, and low trading volumes,
which lead to excessive capital costs. They conclude that the accounting treatment of
immediate expensing R&D may be associated with potential harm (diminished market
liquidity) to the firms. The paper suggests that additional disclosures in the financial
statements about the nature and result of a firms R&D spending may help to mitigate
information asymmetry and improve market liquidity for R&D-intensive firms.
In other words, R&D capitalisation is value relevant and provides useful information
to investors and therefore can reduce the cost of capital.
Expenditures on software are the only R&D costs that can be capitalised
and recognised as an intangible asset (SFAS No. 86) in the USA (Mohd, 2005).
Aboody and Lev (1998) find that capitalised software assets are value relevant.
More specifically, the information of accumulated software assets reported on the
balance sheet is associated with share prices. In addition, capitalisation of software
cost is associated with future earnings, further indicating that the capitalisation
information is relevant to assisting investors make their economic decisions[4].
In Australia, where management discretion in the capitalisation process is permitted,
Abrahams and Sidhu (1998) find that R&D capitalisation by managers of Australian
firms is value relevant and that R&D capitalisation accrual improves accounting-based
measures of firm performance in industries where R&D activity is intensified. Using
UK samples, Oswald and Zarowin (2007) find that R&D capitalisation leads to a
higher association between current stock returns and future earnings. This implies that
investors are better informed by R&D capitalisation.
Goodwill is an area that researchers have frequently investigated. Most find that
purchased goodwill is value relevant (Barth and Clinch, 1996, 1998; Jennings et al.,
1996; Godfrey and Koh, 2001; Dahmash et al., 2009). Jennings et al. (1996) examine the
relationship between accounting goodwill numbers and equity values in the USA.
For a sample of 259 firms from 1982 to 1988, the results indicate that there is a strong
and positive association between equity values and purchased goodwill assets. Barth
and Clinch (1998) further investigate the value relevance of goodwill to US-listed UK,
Australian and Canadian firms. They find that differences in accounting for goodwill
provide incremental power in explaining share returns or prices. Jifri and Citron (2009)
have taken the issue further, evaluating the value relevance of goodwill by separately
examining financial statement recognition vs note disclosure of goodwill accounting.
They find that investors value recognised and disclosed goodwill equally.
In addition, Bugeja and Gallery (2006) investigate whether the value relevance of
purchased goodwill holds as it ages. Using an Australian sample, they find that newly
acquired goodwill has information content but older goodwill does not. Specifically, the
results show that the goodwill acquired in the observation year and each of the previous
two years is positively associated with a firms market value but that association does
not hold when the goodwill was acquired more than two years ago. This is consistent
with Vincents (1994) findings. However, Vincent (1994) finds that the value relevance
relationship can hold for up to five years after the goodwill is purchased.
Most previous studies find that goodwill amortisation is not value relevant.
Amortisation is now prohibited under the IFRS and US standard; instead an annual

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impairment is required. Chen et al. (2004) find evidence of increased value relevance
as the result of adopting impairment testing in SFAS 142. The reported goodwill after
deduction of impairments provides more value relevant information. Chalmers et al.
(2008) investigates whether changing from Australian GAAP to IFRS has increased the
value relevance. Their finding has shown that annual impairment testing is associated
with an increase in value relevance.
Not many studies have addressed issues relating to internally generated intangibles
such as brands, licences and trademarks due to the difficulty in measuring them.
The expenditures on these intangibles are generally prohibited from being capitalised
in most jurisdictions. However, in Australia prior to the adoption of IFRS in 2005,
managers were permitted to have discretion over the capitalisation of these intangibles.
This has provided a rare opportunity for academics to test the value relevance of those
internally generated intangibles. Ritter and Wells (2006) investigate the relationship
between voluntarily recognised and disclosed identifiable intangibles assets (licences,
brand names, trademarks and intellectual property) and stock prices and future
earnings for Australian firms over the period 1979-1997. The outcome demonstrates:
first, a positive association between stock prices and voluntarily recognised and
disclosed identifiable intangible assets and second, a positive association between
identifiable intangible assets and income in future periods. This study again supports
the view that capitalising intangibles will be beneficial to the users of financial
statements. This paper also predicts that with the application of more restrictive
recognition rules from the adoption of IFRS, the value relevance of the recognition and
disclosure of identifiable intangible assets by Australian firms will greatly diminish.
In general, there is a consensus among academics that information about intangible
assets is relevant to the firms value, and more information about intangibles needs to
be recognised; if not, then at least to be disclosed. However, analysts in the business
community have a different view about intangibles. They treat tangible and intangible
assets substantially differently. For example, when analysts evaluate a firms financial
structure or debt levels, they usually use a measurement of total liabilities to tangible
assets. Intangible assets are excluded as core assets. As argued by Wyatt (2008), the
questions raised in intangible studies are: first, why intangibles, in the business
community, are not considered as core assets even if it is agreed that it is a very
important category of investment; and second, whether the reliability of reported
intangibles is of major concern to analysts. This issue needs to be further investigated.
The relationship between the value reliability of reported intangibles and their value
relevance holds the key in the research on intangibles.
2.2 What are the economic consequences of adopting IFRS, particularly on the value
relevance of intangibles?
There are two main reasons for why over 100 countries have already adopted or have
decided to use IFRS in the near future. The first is the belief that IFRS are superior in
terms of quality and are more comprehensive than domestic standards (Daske et al., 2008).
Prior studies have suggested that higher quality financial reporting and better disclosure
are positively associated with market liquidity and firm value. If this is true, then the
application of IFRS should result in an increase in market liquidity, and a decline in cost of
capital (Chua and Taylor, 2008). The second reason is that the move towards IFRS
reporting will make financial statements more comparable and thus less costly for
investors when comparing firms across markets and countries. Therefore, it will facilitate
cross-border investment and the integration of capital markets around the world.

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So far several studies have examined the consequences of adopting IFRS. Barth
et al. (2008) tackle the general question whether the application of IFRS improves the
accounting quality by looking at the three aspects of whether firms that apply IFRS
have demonstrated less earnings management, more timely loss recognition and higher
value relevance than firms that apply domestic standards. Basing their investigation
on a broad sample of firms in 21 countries that adopted IFRS between 1994 and 2003,
they find that firms applying IFRS experience reduced earnings management, more
timely loss recognition, and more value relevance of accounting information than
matched sample firms that do not apply IFRS. This indicates that firms adopting
IFRS have higher quality accounting mechanisms than firms that do not. The paper
also demonstrates that in firms which have been adopting IFRS, accounting quality
has improved in the post-adoption period.
Armstrong et al. (2008) examine the effect of IFRS adoption in Europe. They
investigate the European stock market reactions to sixteen events associated with the
2005 adoption of IFRS in Europe. Using samples from 18 European countries, their
study finds that markets have reacted positively to the adoption of IFRS. This is
consistent with investors expectations of information quality benefiting from the
adoption of IFRS. The study also finds that market reaction is less positive for firms
domiciled in code law countries where enforcement of the implementation of IFRS is
expected to be weaker. For firms within high quality pre-adoption environments or
case law countries, the market reaction is more positive and stronger.
On the other hand, Jeanjean and Stolowy (2008) find contradictory evidence for the
effect of the mandatory introduction of IFRS on earnings quality. Using samples from
three countries, Australia, France and the UK, they find that earnings quality did not
improve following the introduction of IFRS and, in fact, declined in France. The paper
indicates that accounting standards play only a limited role in shaping reporting quality.
Management incentives and national institutional factors play more important roles.
There are also some particular empirical studies on the impact of IFRS on a firms
behaviour regarding the reporting of intangibles. Chalmers et al. (2008) find that the
change from Australian GAAP to IFRS has increased the value relevance of goodwill
but not of identifiable intangible assets. They argue that the reason why identifiable
intangible assets become less value relevant after the adoption of IFRS is because some
identifiable intangible assets, such as brands, are unrecognised in IFRS. This, in turn,
may make information about identifiable intangibles less value relevant.
Using the data from 1998 to 2008 in Portugal, Oliveira et al. (2010) find that the
value relevance of goodwill, R&D and other intangible assets has increased after
the adoption of IFRS. Tsoligkas and Tsalavoutas (2011) investigate the value relevance
of R&D after the implementation of IFRS in the UK. Their results show that the
capitalised R&D expenditure is positively value relevant during the first three years
of the mandatory implementation of IFRS, while such evidence was not found during
the pre-IFRS period under UK GAAP. In addition, they also find that the expensed
portion of R&D expenditure is significantly and negatively value relevant. Their
findings support the view that accounting information disclosed under IFRS better
reflects companies economic fundamentals.
Chalmers et al. (2012) study the association between the accuracy and dispersion
of analysts earnings forecasts and aggregated reported intangibles. They find
that negative correlation between the two becomes stronger after IFRS adoption,
suggesting that accounting information under IFRS provides more useful information,
particularly about reported goodwill since goodwill valuation requires an impairment

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approach under IFRS whereas the former Australian GAAP uses a straight-line
amortisation approach. They argue that the impairment approach provides a more
accurate valuation of goodwill which in turn makes the information about intangibles
more value relevant allowing analysts to make earnings forecasts more precisely.
2.3 What is the impact of value reliability on the value relevance of intangibles?
At present, only a few studies have been done on disentangling the riddle of the value
relevance and value reliability of intangibles. Dahmash et al. (2009) examine the
value relevance and reliability of reported goodwill and identifiable intangible assets
under Australian GAAP from 1994 to 2003. They use the coefficients of reported
goodwill and identifiable assets as the measurements of value relevance and value
reliability. They argue that the coefficients of both unidentifiable intangibles (goodwill)
and identifiable intangibles (such as brand names, master headings) are value relevant
if they are significantly different to zero. These coefficients are also more reliable if they
are not significantly different to one. They find that the information for both goodwill
and identifiable assets is value relevant but not reliable. Goodwill assets are reported
conservatively while identifiable intangible assets are reported aggressively.
Kallapur and Kwan (2004) explore the value relevance and reliability of brand
assets recognised by UK firms. They find that recognised brand values are value relevant.
However, the market capitalisation rates of brands for firms with low contracting
incentives (i.e. more reliable) are higher than those firms with high contracting incentives
(i.e. less reliable). It shows that there are significant differences in the value relevance
of brands with different levels of contracting incentives (the measurement of value
reliability). They show that there is a complementary relationship between the value
relevance and value reliability of intangible asset information. The more reliable is
its information about intangibles, the more value relevant is that information.
Kadous et al. (2010) investigate whether financial statement users judge relevance based
on properties of reliability in an experimental setting. They design three experiments
to investigate the hypothesis that financial statement users assessments of the value
relevance of an economic construct (such as intangibles) are influenced by the underlying
reliability of its measurement. The results indicate that factors underlying reliability
influence judgements of relevance, but factors underlying relevance do not influence
judgements of reliability.
3. Regulating intangibles in Australia and critical issues
Regulating the accounting for intangible assets is arguably the most controversial
and difficult area faced by accounting standard-setters worldwide (Lev, 2001, 2003;
Upton, 2001; Wyatt, 2005)[5]. The issue is particularly important because international
mergers and acquisitions have experienced accelerated growth, and international
financial markets have also developed rapidly (Hoegh-Krohn and Knivsfla, 2000;
Lev, 2008; Kanodia et al., 2004). In international transactions, intangible assets, especially
goodwill, generally dominate the underlying economic value of assets acquired. No
universal acceptable rules have yet been devised on which types of intangibles could
be recognised and how those recognised intangibles could be measured and reported
in financial statements.
In Australia prior to 2005, there were accounting standards to specifically regulate
certain types of intangibles. These standards include AASB 1011 Accounting
for Research and Development Costs and AASB 1013 Accounting for Goodwill
(Australian Accounting Standard Board, 1987, 1996). R&D can be capitalised if they

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are expected beyond any reasonable doubt to be recoverable. Capitalised R&D costs
must be amortised over future financial years to match them to related benefits,
beginning with the commercial production of the product. Purchased goodwill needs
be capitalised and amortised through earnings using a straight-line method over
a period of five to 20 years. There had also been some attempts to develop general
standards governing the full range of these assets in Australia, most notably
the publication of ED 49 Accounting for Identifiable Intangible Assets (ED 49) by the
Australian Accounting Research Foundation in 1989. ED 49s general proposition is
that both purchased and internally developed intangible assets are to be brought to
account (Alfredson, 2001). Under ED 49, purchased identifiable intangible assets
are recorded at the cost of acquisition and internally generated identifiable intangible
assets are recorded at either cost or at the lowest price at which they could currently
be obtained in the normal course of business, as determined by independent
valuers. ED 49 required amortisation but it nominated no maximum period. Since
there was a lack of consensus on a number of issues such as the requirement to
amortise all identifiable intangible assets including brand names, the exposure draft
was withdrawn in 1992.
After adopting IFRS in 2005, Australian accounting standards setters have returned
to a more conservative approach. Current reporting requirements for intangibles
in Australia have been included in AASB 3 (IFRS 3 Business Combinations) and
AASB 138 (IAS 38) Intangible Assets. Under the current requirements in AASB
138 Intangible Assets, which is in line with international accounting standards, only
externally purchased goodwill and other identifiable intangibles (e.g. patents, licences)
can be capitalised and subsequently are subjected to an impairment test. Research
costs are expensed immediately and only development costs can be carried forward.
The only less conservative accounting treatment brought by the implementation of
IFRS in relation to intangibles is that intangibles with infinite life (e.g. goodwill) are
no longer needed to be amortised over 20 years; instead intangibles are subject
to regular impairment tests. From a signalling theory perspective, the requirement
of impairment tests permits managers to exercise their discretion and hence
the reported goodwill can better reflect the true economic value. However, from the
agency theory perspective, such discretionary power may be easily manipulated
by managers to achieve their own ends. Table I summarises the main differences
in accounting standards for intangible assets before and after the adoption of
IFRS in Australia.
Judging by the history of regulating intangibles by accounting standard setters in
Australia, the UK, the USA and by IASB, it can be seen that the more conservative
approach has prevailed. This is despite the fact that many academics and practitioners
have for more than two decades argued for more intangible assets to be recognised and
disclosed in financial statements. The reason why regulating accounting for intangibles
is most controversial and difficult is because regulators face many dilemmas and they
have to consider the economic consequences of their decisions.
The first dilemma is the trade-off between the possibilities of manipulating vs the
possibilities of signalling when managers select the permitted accounting treatments
for intangibles. There are two competing theories that can predict the behaviours of
preparers or managers: opportunistic theory and efficient contracting theory. According to
opportunistic theory, managers choose accounting policies in order to maximise their own
interests rather than to provide useful information to the users and to protect shareholder
well-being. Consequently, giving more discretionary powers to managers may lead to more

Value relevance
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189

Recognise separately from goodwill if


they arise as a result of contractual or
legal rights or are separable from the
business and can be reliably measured.
Intangibles with finite lives should be
amortised. Intangibles with indefinite
lives should be subjected to annual
impairment testing
Under the AASB 1015
acquisition of assets, which
was issued in 1999 and
applicable to the financial year
ending on or after 31 December,
identifiable intangibles in a
business combination must be
accounted for in a similar
manner with accounting for
goodwill
Both research and development
costs may be capitalised if
certain criteria are met

R&D costs

Both research and development costs may be


capitalised

(continued )

No intangible asset arising from


research (or from the research phase of
an internal project). Development cost
can be capitalised if, and only if,
certain criteria are met

Goodwill is recognised as an asset


with no amortisation. Impairment test
to be conducted annually or more if
necessary
Internal generated goodwill shall not
be recognised

Goodwill can be recognised


when it was acquired by
purchasing an existing
business
Goodwill is amortised to
income over a period not to
exceed 20 years
Internal generated goodwill
may not be brought to account

The presumption is that goodwill has a maximum


useful life of 20 years and it should be amortised over
its estimated useful life. If the goodwills estimated
useful life exceeds 20 years, the enterprise needs to:
first, test goodwill for impairment at least annually
in accordance with IAS 36 Impairment of Assets; and
second, disclose the reasons why the presumption
that the useful life of goodwill will not exceed
20 years from initial recognition is rebutted, and also
disclose the factor(s) that play a significant role in
determining the useful life of goodwill
Identifiable intangibles in a These can be recognised as a result of a business
business combination
combination. The useful life of an identifiable
intangible asset should not exceed 20 years and an
intangible asset is to be carried at its cost less any
accumulated amortisation and impairment losses

Goodwill acquired in a
business combination

Issues

Table I.
Summary of major
differences between IFRS
and Accounting for
intangibles in Australia
(2001-2010)
IFRS and Equivalent Requirements
after 2005 (IFRS 3-AASB 3 Business
Combinations IAS 38-AASB 138
Intangible Assets IAS 36-AASB 136
Impairment of Assets)

190

AASB requirements in
Australia (2001-2004) (AASB
1011 Accounting for Research
IASB requirements before 2004 (IAS 22 Accounting and Development; AASB 1013
for Business Combinations IAS 38 Intangible Assets) Accounting for Goodwill)

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Internally generated
brands, mastheads,
publishing titles, customer
lists
Revaluation of intangible
assets

Issues

These items are similar in substance


and should not be recognised as
intangible assets

The standard prohibits the recognition of internally Many internally generated


generated brands, mastheads, publishing titles and intangibles such as copyrights
and brands were permitted to
similar intangibles
be shown in the balance sheet
Revaluation of intangibles is only permitted where Revaluation of internally
there is an active market
generated intangible assets is
permitted

Revaluation restricted to fair value


determinations by reference to an
active market. This requirement will
greatly reduce the incidence of
revaluations of intangible assets
Only intangibles that have been
acquired at a cost can subsequently be
revalued

IFRS and Equivalent Requirements


after 2005 (IFRS 3-AASB 3 Business
Combinations IAS 38-AASB 138
Intangible Assets IAS 36-AASB 136
Impairment of Assets)

AASB requirements in
Australia (2001-2004) (AASB
1011 Accounting for Research
IASB requirements before 2004 (IAS 22 Accounting and Development; AASB 1013
for Business Combinations IAS 38 Intangible Assets) Accounting for Goodwill)

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Value relevance
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intangible assets
191

Table I.

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192

opportunities for them to manipulate financial information. In contrast, according to


the other theory efficient contracting theory managers have more self-constraint in the
assumption that a compensation contract, a debt contract and good corporate governance
can limit opportunism and motivate managers to choose appropriate accounting policies.
Therefore, giving managers more discretionary powers may provide them with more
opportunities to signal a firms true economic state. There is a trade-off between
possibilities for manipulating and possibilities for signalling. Regulators have difficulty in
deciding whether to give more discretionary powers to managers that allow them to better
recognise more intangible assets on a balance sheet, or to give them less discretionary
powers to make financial information more reliable (Figure 1).
The second dilemma faced by accounting regulators is that they may be unable to
improve the value relevance and value reliability of the information about intangible
assets simultaneously through existing accounting standards for intangibles.
Both value relevance and value reliability are equally important because unreliable
information can diminish the relevance of that information[6]. From a preparers
perspective, if given more discretionary powers in capitalising intangibles and
subsequently expensing them, they may have a better opportunity to reveal relevant
information about the firms real economic state. However, the usefulness of financial
information is eventually determined by users and not preparers. Users need to be able
to understand signals sent by managers. If users are unable to decipher the signals
or they become more confused by those signals, then managers efforts are useless.
Providing managers with more discretionary powers can increase the possibility of
signalling. At the same time, however, it also increases the ability to contemplate the
quality of signals. Signals may become more noisy and unreliable and eventually
irrelevant. In previous value relevance studies on intangibles, value reliability has been
omitted or not controlled well due to the difficulty of the model design (Wyatt, 2008,
p. 217). Intangibles are categorised (such as goodwill, brands, R&D expenditures)
then regressed aggregately on share prices and returns. Studies failed to distinguish
whether the signals such as a capitalised brand were sent by an efficient firm or an
Accounting Policies for Intangible Assets

Judgement is not
permitted

Expensing

Figure 1.
Economic consequences
of accounting policies
for intangible assets

Amortising
systematically

Less possibility for


signalling and manipulating
More reliable

Judgement is allowed

Capitalising

Impairing
discretionarily

More opportunities for


signalling and manipulating
More relevant

opportunistic firm. Market reactions to those two signals are different. In our research,
we divide the sample into two parts according to the value reliability of the signals
sent by firms. We expect that intangibles are more value relevant if the market can
understand that they are also more reliable. If investors suspect the value reliability of
information about intangibles that are used by managers signalling economic reality,
then the relevance of such information will diminish very quickly.

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4. Methodology and hypothesis development


4.1 Hypothesis development
This paper addresses four fundamental accounting research questions:
RQ1. Are accounting treatments of intangible assets associated with the markets
valuation of the firm, both in the pre- and post-adoption periods?
RQ2. Is the value relevance of intangibles affected by the value reliability of intangibles?
RQ3. Has the introduction of IFRS improved the value relevance of intangible assets?
RQ4. Has the relationship between value relevance and value reliability changed
after IFRS have been adopted?
Using a sample of Australian firms over a 25-year period (1975-1999), Goodwin and
Ahmed (2006) find that value relevance in those firms which capitalise intangibles has
increased more than in those firms which do not capitalise intangibles. Hoegh-Krohn
and Knivsfla (2000) examine accounting for intangibles in Scandinavia, the UK, the
USA and by the IFRS and how the regulators in these countries have responded to the
increased importance of intangibles through issuing or revising accounting standards.
They conclude that in order to improve the informativeness and value relevance of
financial reports, all types of intangibles should be capitalised and subsequently
amortised over their useful lives. As a general proposition, if managers capitalise only
those expenditures that give rise to future economic benefits, there should be a positive
association between capitalised intangible assets and the market value of equity. This
gives rise to H1:
H1. There is a positive association between the market value of equity and the book
values of capitalised intangible assets.
Godfrey and Koh (2001) analyse the value relevance of reported goodwill, capitalised
R&D and other identifiable intangibles in Australia. Using a sample of 172 firms from
top-500 listed Australian firms in 1999, they also find that both goodwill and identifiable
intangible assets are value relevant, but capitalised R&D is not. Dahmash et al. (2009)
investigate the value relevance of reported goodwill and identifiable intangible assets
under Australian GAAP from 1994 to 2003, prior to the adoption of IFRS. The results
indicate that, in general, reported intangibles (both goodwill and identifiable intangible
assets) by Australian companies are value relevant. However, goodwill assets are
reported conservatively while identifiable intangible assets are reported aggressively.
They conclude that investors are likely to value individual classes of intangibles
differently, according to the probable timing and magnitude of the potential benefits to be
realised. As such, we divide aggregated capitalised intangibles into two categories:

Value relevance
and reliability of
intangible assets
193

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capitalised goodwill and capitalised other identifiable intangible assets. H1 is subdivided


as follows:
H1a. There is a positive association between the market value of equity and the
book values of capitalised goodwill.

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194

H1b. There is a positive association between the market value of equity and the
book values of capitalised other identifiable intangible assets (or intangible
assets other than goodwill).
To date there have been very limited studies on the association between value relevance
and reliability of intangibles because of the difficulty in how to measure value reliability
(Wyatt, 2008). Kallapur and Kwans (2004) paper is the first study on this issue. They
argue that there can be a substantial difference in the reliability of reported brands due to
different levels of contracting incentives, e.g. whether capitalisation of brands enabled
firms to avoid the scrutiny of their transactions from shareholders or whether the firm
has a higher debt-to-book-equity ratio. They partition the sample according to whether
firms have a lower or higher contracting incentive to overstate capitalised brand
assets. They find that the value relevance of brand assets is higher in the firms with
a lower contracting incentive or, in other words, in the firms where information about
capitalised brands is more reliable. In general, investors prefer to receive more reliable
information. If the information concerning intangibles is more reliable, then it improves
the value relevance of intangibles. There is a complementary relationship between the
value relevance of intangibles and the value reliability of intangibles. Our H2 is
formulated as:
H2. There is a positive association between the value relevance of intangibles and
the value reliability of intangibles.
Different types of intangible assets, e.g. identifiable intangibles vs unidentifiable
intangibles (goodwill) can be capitalised with different degrees of value reliability.
As such, H2 can be subdivided into:
H2a. The positive relationship between market value and capitalised intangibles is
stronger in firms in which information about goodwill is measured more reliably.
H2b. The positive relationship between market value and capitalised intangibles is
stronger in firms in which information about other identifiable intangible
assets is measured more reliably.
One of the major motivations for adopting IFRS is to improve the value relevance
of financial information. Barth et al. (2008) investigate whether the application of IFRS
is associated with higher accounting quality. The study examines three factors, one
of them being value relevance, and Australia is one of the 21 countries selected in
their study. Their results show that there is a higher association between accounting
information and share prices as well as returns in countries adopting IFRS. Chalmers
et al. (2008) examine whether the value relevance of reported intangibles differs
between the pre- and post-adoption periods of IFRS. They find that only the value
relevance of goodwill has been improved after the adoption of IFRS. In summary, most

prior studies show that the adoption of IFRS has a positive impact on the value
relevance of accounting information (Daske et al., 2008). Thus, H3 is formulated:
H3. The value relevance of intangibles is improved after the adoption of IFRS.
It is predicated that the informativeness of the following categories of intangibles is
improved after the adoption of IFRS:

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H3a. The value relevance of the capitalised goodwill is improved after the adoption
of IFRS.
H3b. The value relevance of capitalised other identifiable intangible assets (including
intangible assets other than goodwill) is improved after the adoption of IFRS.
Theoretically, if the new international accounting standard on intangibles can improve
both the value relevance and reliability of financial information about intangibles, then
better results can be expected. However, mixed results may be found because this new
IFRS standard has compromised in its requirements. On the one hand, the new IFRS
standard for intangibles limits the possibilities to capitalise intangibles on a balance
sheet. This will result in less information about intangibles being reported. Consequently,
value relevance may decline while value reliability of capitalised intangibles may improve
due to more restrictive requirements for capitalising intangibles. On the other hand, the
new IFRS standard provides managers with more discretionary powers in determining
the amount of impairment losses of intangibles through the income statement. It may
improve the relevance of information but at the same time it may reduce the reliability of
such information because how much impairment expenses on intangibles can be reported
in financial statements is decided largely by managers. Therefore, our H4 is formulated as:
H4. The relationship between the value relevance of intangibles and the value
reliability of intangibles has not changed after the adoption of IFRS.
4.2 Research design and variable measurement
We apply the two price models derived from Ohlson theory (Feltham and Ohlson,
1995)[7] to test our hypotheses. Our first model is as follows:
MVit a0 a1 TTAit  TLit a2 ITAit a3 EBITit eit

Model 1 depicts that the market value of equity is a function of reported tangible assets
minus liabilities, intangibles, earnings before interest and tax (EBIT). Total intangible
assets in Model 1 are disaggregated to goodwill and other identifiable intangibles
which lead to Model 2:
MVit a0 a1 TTAit  TLit a2 GWit a3 NGWit a4 EBITit eit

where MV is the market value of equity at the end of three months after financial year;
TTA the total tangible assets total fixed assets total current assets; TL the
total liabilities; TTA-TL the total fixed assets total current assets total liabilities;
ITA the intangible assets; GW the goodwill; NGW the other identifiable intangibles
(or intangible assets other than goodwill); and EBIT the earnings before interest and tax.

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196

All variables in Models 1 and 2 are scaled by number of ordinary shares to reduce
heteroskedasticity. Our contributions to the value relevance of intangibles literature in
terms of methodology is that total tangible assets (TTA) and total liabilities (TL) have
been combined into a single variable in Models 1 and 2. The technical improvements in
modelling are three-fold. First, we can avoid the multicollinearity problem (tangible
assets and liabilities are highly correlated) found in previous studies. Second, this new
variable also has economic significance and it measures the tangibility (solidity) of
a firms assets. It is expected that markets react differently depending on the different
degrees of tangibility of assets in firms. The market reacts positively (a140) if the
measurement of tangibility of assets is 40 (TTA-TL40) whereas market reaction is
negative (a1o0) if the measurement of tangibility is o0 (TTA-TLo0). Third, this
measurement can also be used to assess the reliability of information on intangibles
since investors believe that the information on intangibles is more reliable in firms
where the value of TTA is greater than the value of TL. The reason is that if a firms
TTA can cover all the debts (TTA-TL40), the firm has less incentive to inflate total
assets through the capitalisation of intangibles.
One could argue that this new variable (TTA-TL) is similar to leverage. However,
a correlation analysis has revealed that the measurement of tangibility (tangibility
ratio (TTA-TL)/TA) is different to leverage (leverage ratio TL/TA)[8]. These two
ratios are negatively correlated (coefficient 0.5843, po0.0001). This indicates
firms with more tangible assets are less likely to have more debts. It also shows that
capitalised intangibles are positively associated with the leverage ratio but are
negatively related to the tangibility ratio. The correlation between capitalised
intangibles (ITA) and the leverage ratio is 0.1659 ( po0.0001) while the correlation
between capitalised intangibles (ITA) and the tangibility ratio is 0.2623 ( po0.0001).
The positive relationship between capitalised intangibles and the leverage ratio means
that managers in firms with a higher leverage ratio may have stronger incentives to
recognise intangibles in order to alleviate debt covenant restrictions, or to improve
borrowing capacity, etc. However, managers may have other incentives for capitalising
intangibles (Wyatt, 2005). One of these incentives depends on the asset structure of
firms, or whether firms have more solid (or tangible) assets. This issue has not been
investigated in prior studies. The negative relationship between capitalised intangibles
and the tangibility ratio reveals that firms with more soft assets (a lower tangibility
ratio) are more likely to capitalise intangibles.
H1 is tested in Models 1 and 2. If the capitalisation of intangible assets is value
relevant, then a2 in Model 1 will be significantly 40. Model 2 tests the value relevance
of individual groups of capitalised intangible assets. If a2 and a3 are significantly 40
in Model 2, then investors deem capitalisation of the associated individual type of
intangible assets to be value relevant (Barth, 2000).
H2 is tested by dividing the sample into two groups: first, firms with their TTA
minus TL 40; and second, firms with their TTA minus TL o0. It can be argued that
firms with more solid assets (TTA minus TL is 40) have less incentive to use
intangibles to inflate their total assets in order to fine tune their financial structure and
to avoid the possibility of breaching the debt covenants. Intangible assets reported by
those firms are generally believed to be more reliable. We compare a2 in Model 1; a2 and
a3 in Model 2 between firms with a positive or negative measurement of tangibility.
If the coefficients (a2 in Model 1; a2 and a3 in Model 2) in the group with more reliable
information of intangibles are significantly higher than those in the group with less
reliable information of intangibles, we can conclude that value reliability has a positive

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impact on value relevance. t-tests will be used in determining whether the coefficients
between two the sub-groups are significantly different (Knoke et al., 2002).
Testing of H3 is carried out by comparing a2 in Model 1; a2 and a3 in Model 2
between the pre-adoption and post-adoption periods. If the coefficients in the
post-adoption period are significantly higher, then we can conclude that the adoption
of IFRS has improved value relevance. H4 is tested by checking whether the
positive relationship between value relevance and value reliability still holds in
the post-adoption period. If, in the post-adoption period, the coefficients (a2 in Model 1;
a2 and a3 in Model 2) in the group with more reliable information of intangibles are still
significantly higher than those in the group with less reliable information of intangibles,
then we can conclude that the adoption of IFRS has been successful.

Value relevance
and reliability of
intangible assets
197

5. Sample selection and results


5.1 Sample selection
Intangible assets have become a large component of total assets. In Australia, the total
capitalised intangibles for the A&P 500 companies are $A52 billion (in Australian
dollars) in 2004, which accounts for 14 per cent of the total assets[9]. As reported in
Table II, the coverage of our sample is from 2000 to 2009 and the sample firms
include all firms reporting goodwill or other types of intangibles in that year. The total
6,550 observations are selected which include 2,314 observations in the pre-adoption
period, 1,306 observations in the transition period and 2,930 observations in the
post-adoption period.
Table III provides information about the different types of intangibles assets reported
by firms in different industries. It shows that most firms that report capitalised
intangibles (including goodwill and other types of intangibles) are in the industrial sector
Sample selection

Sample

Coverage (2000-2009)
Companies that reported intangibles
Final sample size after omission of
firms with negative book value and
missing observations of market value,
intangibles in each year
Per-adoption years
2000
2001
2002
2003
Sub total
During-adoption years
2004
2005
Sub total
Post-adoption years
2006
2007
2008
2009
Sub total
Total

15,796
6,550

485
614
622
593
2,317
638
668
1,306
713
777
804
636
2,930
6,550

Table II.
Sample selection

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Table III.
Industry distribution
of sample firms

Industries

GICS

Energy
Materials
Industrials
Consumer discretionary
Consumer staples
Health care
Financials
Information technology
Telecommunication services
Utilities
All

10
15
20
25
30
35
40
45
50
55

Intangible assets
204
707
1,260
1,199
430
765
893
782
196
114
6,550

(3.11%)
(10.79%)
(19.24%)
(18.31%)
(6.56%)
(11.68%)
(13.63%)
(11.94%)
(2.99%)
(1.74%)
(100%)

Goodwill
96
485
1,030
960
333
414
689
586
150
56
4,799

Other intangibles

(2.00%)
(10.11%)
(21.46%)
(20.00%)
(6.94%)
(8.63%)
(14.36%)
(12.21%)
(3.13%)
(1.17%)

156
477
892
941
349
649
619
556
150
106
4,895

(3.19%)
(9.74%)
(18.22%)
(19.22%)
(7.13%)
(13.26%)
(12.65%)
(11.36%)
(3.06%)
(2.17%)
(100%)

(19.24 per cent). The next highest sectors are the consumer discretionary sector
(18.31 per cent) and the financial sector (13.63 per cent). Table III also shows that 4,799
firm-year observations (73.27 per cent) reported goodwill. Breaking down this figure into
different industries, 21.46 per cent (1,030 observations) of firms in the industrial sector,
20 per cent (960 observations) in the consumer discretionary sector and 14.36 per cent
(689 observations) in the financial sector report goodwill. 4,895 out of 6,550 firm-year
observations (74.73 per cent) report identifiable intangible assets, such as brands, licences
and patents. The majority of these firms are in the consumer discretionary sector
(19.22 per cent) and the industrial sector (18.22 per cent).
Table IV provides the descriptive statistics for all the variables in the price models.
All the variables are denominated in Australian dollars. Table IV shows that the
average share price is A$2.85 per share (median of share price is A$0.73) and the share
prices are positively skewed. On average, the book value of assets per share is A$5.49
and the book value of liability per share is A$3.79; therefore the average M/B ratio is
1.68. The reason why the M/B ratio is 41 is that Australia has not fully embraced fair
value measurements. Most non-current assets are still measured at cost. On average,
the capitalised intangible is A$0.6 (median is A$0.09) per share with a wide spread.

MV
TA
TL
TTA
ITA
GW
RD
NGW
EBIT
Table IV.
Basic descriptive statistics
for dependent and
independent variables
for price models

Mean

Median

Maximum

Minimum

SD

Observations

2.8458
5.4923
3.7932
4.0466
0.6032
0.3831
0.0104
0.2271
0.2622

0.7300
0.8830
0.3657
0.4888
0.0906
0.0318
0.0000
0.0088
0.0578

37.7300
154.2762
126.4066
130.4860
10.6922
10.0829
0.8831
6.0054
4.8647

0.0080
0.0064
0.0007
0.0020
0.0000
0.0000
0.0000
0.0000
0.7658

5.7908
19.2373
15.7594
16.0697
1.5123
1.1781
0.0575
0.7629
0.6767

6,550
6,550
6,550
6,550
6,550
6,550
6,650
6,550
6,550

Notes: MV, Market value of equity at the end of three months after financial year; TA, total
assets; TTA, total tangible assets total fixed assets total current assets; TL, total liabilities;
TTA-TL, total fixed assets total current assets total liabilities total fixed assets working
capitals long-term liabilities; ITA, intangible assets; GW, goodwill; RD, notional capitalised research
and development; NGW, other identifiable intangibles (or intangible assets other than goodwill); EBIT,
earnings before interests and tax. All variables are scaled by number of ordinary shares

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With the capitalised intangibles, more than half are unidentifiable intangibles or
goodwill (mean of goodwill is A$0.38 per share); less than half of them are other
identifiable intangibles (mean of other intangible assets is A$0.22 per share).
Table V shows the descriptive statistics for all the variables in the return models.
All independent variables in the return models are scaled by total equity (the return
models will be used in additional tests). The average market return is 11 per cent
for all sample firms. The average earnings before interest, tax and amortisation
(impairment) are 0.03 with a maximum of 30.37 and a minimum of 23.01. The positive
earnings capacity has not been reflected in the returns. The average of change in
earnings before interest, tax and amortisation (impairment) is 0.02 while the
amortisation expense (or impairment losses) on intangibles amount to 0.04 which is
double the amount of the amortisation expense (or impairment losses) on tangible assets.
Table VI illustrates the movements of the mean average of percentage of intangibles
over total assets, the mean average of percentage of goodwill over intangibles and the
mean average of percentage of intangibles other than goodwill over total intangibles.
From 2001 to 2009 the percentage of intangible assets over total assets has been
steadily increasing, from 17.72 per cent in 2000 to nearly 25.07 per cent in 2009[10].
Goodwill is the most frequently reported intangible. The mean ratio of goodwill
over total intangibles is 56.21 per cent over the period. This ratio has fluctuated over
time, from 59.08 per cent in 2000, decreasing to 52.57 per cent in 2007 and returning to
54.20 per cent in 2009. The ratio of other identifiable intangibles over total intangibles
has increased from 40.92 per cent in 2000 to 45.80 per cent in 2009. Tables IV-VI also
indicates that the adoption of IFRS has little impact on firm behaviours in terms of the
capitalising of both identifiable and unidentifiable intangibles (goodwill). Over the
transition period (2004-2005) for the adoption of IFRS, the percentages of intangibles
over total assets had not changed.

Value relevance
and reliability of
intangible assets
199

5.2 Univariate analysis


Pearson pair-wise correlations among the variables are shown in Tables VII, VIII.
In Table VII, the firm value (share price) is significantly correlated with tangible
assets (coefficient, 0.5441) and intangible assets (coefficient, 0.5737). Both goodwill
(coefficient, 0.5435) and other identifiable intangibles (coefficient, 0.3289) are value

RETURN
EBITA
DEBITA
AMORITA
AMORTTA
AMORGW
AMORNGW

Mean

Median

Maximum

Minimum

SD

Observations

0.1057
0.0266
0.0168
0.0426
0.0212
0.0166
0.0260

0.0272
0.0810
0.0097
0.0058
0.0000
0.0000
0.0024

3.6517
30.2563
37.3652
11.8599
23.1372
11.6489
2.6679

5.0262
23.0125
117.8689
0.0297
0.0954
0.0000
0.0490

0.6802
1.0764
2.0453
0.2590
0.3822
0.2301
0.1056

5,094
5,094
5,094
5,094
5,094
5,094
5,094

Notes: RETURN, return of equity for 12-month period ended three months after financial year;
EBITA, earnings before interest, tax and amortisation (impairment); DEBITA, change of earnings
before interest, tax and amortisation (impairment); AMORITA, amortisation expense (impairment
Table V.
losses) of intangible assets; AMORTTA, amortisation expense (impairment losses) of tangible assets; Basic descriptive statistics
AMORGW, amortisation expense (impairment losses) of goodwill; AMORNGW, amortisation expense
for dependent and
(impairment losses) of intangible assets other than goodwill. All variables other than RETURN are
independent variables
scaled by total equity
for return models

Table VI.
Comparison of three
different ratios of
intangible assets
from 2000 to 2009
0.1964
0.1110
0.9359
0.0000
0.2204
614
0.5910
0.7873
1.0000
0.0000
0.4327
614
0.4090
0.2127
1.0000
0.0000
0.4327
614

0.1772
0.0952
0.8362
0.0000
0.2016
485

0.5908
0.7912
1.0000
0.0000
0.4286
485

0.4092
0.2088
1.0000
0.0000
0.4286
485

2001

0.4273
0.2224
1.0000
0.0000
0.4406
622

0.5727
0.7776
1.0000
0.0000
0.4406
622

0.2141
0.1214
0.9713
0.0000
0.2324
622

2002

0.4292
0.2509
1.0000
1.6606
0.4494
593

0.5708
0.7491
2.6606
0.0000
0.4494
593

0.2243
0.1330
0.9893
0.0000
0.2366
593

2003

0.4185
0.2097
1.0000
0.0000
0.4410
638

0.5815
0.7903
1.0000
0.0000
0.4410
638

0.2334
0.1402
0.9697
0.0000
0.2450
638

2004

0.4142
0.2163
1.0000
0.0000
0.4350
668

0.5858
0.7837
1.0000
0.0000
0.4350
668

0.2378
0.1469
0.9692
0.0000
0.2406
668

2005

0.4747
0.3698
1.0000
0.0000
0.4208
713

0.5253
0.6302
1.0000
0.0000
0.4208
713

0.2403
0.1619
0.9513
0.0000
0.2348
713

2006

0.4743
0.3505
1.0000
0.1334
0.4237
777

0.5257
0.6495
1.1334
0.0000
0.4237
777

0.2445
0.1694
1.0000
0.0000
0.2368
777

2007

0.4436
0.2622
1.0000
0.0000
0.4224
804

0.5564
0.7378
1.0000
0.0000
0.4224
804

0.2423
0.1703
0.9664
0.0000
0.2380
804

2008

0.4580
0.3114
1.0000
0.0000
0.4201
636

0.5420
0.6886
1.0000
0.0000
0.4201
636

0.2507
0.1735
0.9702
0.0000
0.2447
636

2009

0.4379
0.2675
1.0000
1.6606
0.4314
6,550

0.5621
0.7325
2.6606
0.0000
0.4314
6,550

0.2284
0.1407
1.0000
0.0000
0.2352
6,550

All

Notes: TA, Total assets; ITA, intangible assets; GW, goodwill; NGW, other identifiable intangibles (or intangible assets other than goodwill). All variables are
scaled by number of ordinary shares

ITA/TA
Mean
Median
Maximum
Minimum
SD
Observations
GW/ITA
Mean
Median
Maximum
Minimum
SD
Observations
NGW/ITA
Mean
Median
Maximum
Minimum
SD
Observations

2000

200

Rations

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ARA
22,3

Probability
MV
TA
TL
TTA

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ITA
GW
NGW
RD
EBIT

MV

TA

TL

1.0000

0.5861
0.0000
0.5278
0.0000
0.5441
0.0000
0.5435
0.0000
0.5435
0.0000
0.3289
0.0000
0.2945
0.0000
0.6632
0.0000

1.0000

0.9886
0.0000
0.9853
0.0000
0.5234
0.0000
0.5234
0.0000
0.2744
0.0000
0.1737
0.0000
0.3037
0.0000

1.0000

0.9856
0.0000
0.4531
0.0000
0.4531
0.0000
0.2227
0.0000
0.1444
0.0000
0.2095
0.0000

TTA

ITA

GW

NGW

RD

EBIT

201
1.0000

0.4473
0.0000
0.4473
0.0000
0.2054
0.0000
0.1632
0.0000
0.2412
0.0000

0.8434
0.0000
0.8434
0.0000
0.7450
0.0000
0.2572
0.0000
0.6129
0.0000

1.0000

1.0000

0.3481
0.0000
0.2885
0.0000
0.5794
0.0000

1.0000

0.0986
0.0000
0.4140
0.0000

1.0000

0.2760
0.0000

1.0000

Notes: MV, Market value of equity at the end of three months after financial year; TA, total assets;
TTA, total tangible assets total fixed assets total current assets; TL, total liabilities; TTA-TL,
total fixed assets total current assets total liabilities total fixed assets working capitals
long-term liabilities; ITA, intangible assets; GW, goodwill; NGW, other identifiable intangibles (or
intangible assets other than goodwill); EBIT, earnings before interest and tax. All variables are scaled
by number of ordinary shares

Probability

Value relevance
and reliability of
intangible assets

Table VII.
Pearson correlation for
variables in price model

RETURN EBITA DEBITA AMORITA AMORTTA AMORGW AMORNGW

RETURN

1.0000

EBITA
0.1298
0.0000
DEBITA
0.0571
0.0000
AMORITA
0.1517
0.0000
AMORTTA 0.1782
0.0000
AMORGW
0.0910
0.0000
AMORNGW 0.1738
0.0000

1.0000

0.2340
1.0000
0.0000

0.1559 0.1141
0.0000
0.0000
0.0822
0.0486
0.0000
0.0005
0.1658 0.1287
0.0000
0.0000
0.0210
0.0005
0.1338
0.9720

1.0000

0.0518
0.0002
0.9134
0.0000
0.4619
0.0000

1.0000

0.0040
0.7756
0.1357
0.0000

1.0000

0.0607
0.0000

1.0000

Notes: RETURN, return of equity for 12-month period ended three months after financial year; EBITA,
earnings before interest, tax and amortisation; DEBITA, change of earnings before interest, tax and
amortisation (impairment); AMORITA, amortisation expense (impairment losses) of intangible assets;
AMORTTA, amortisation expense (impairment losses) of tangible assets; AMORGW, amortisation
expense (impairment losses) of goodwill; AMORNGW, amortisation expense (impairment losses) of
intangible assets other than goodwill. All variables other than RETURN are scaled by total equity

Table VIII.
Pearson correlation for
variables in return model

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202

relevant. The correlation between firm value and liabilities is also significant. The
positive sign means firms with higher market value have more debts. The impact of
liabilities on firm value will be investigated in multivariate analysis after controlling for
other factors that also have an impact on a firms value. EBIT expenses are positively
and significantly correlated to market prices (coefficient, 0.6632). The coefficient between
tangible assets and liabilities (0.9856) in Table VII indicates the potential existence of
a multicollinearity problem. To mitigate this issue, either one of the variables could be
deleted or the two highly correlated variables could be combined into a new variable.
The second approach has been adopted in this paper.
Table VIII shows the correlations among the variables in the return models.
The return is positively and significantly associated with earnings before interest, tax
and amortisation (impairment) (coefficient, 0.1298). The return is also strongly related
to changes of earnings before interest, tax and amortisation (impairment) (coefficient,
0.0571). As amortisation expense (impairment losses) will reduce a firms earnings
capacity, in turn, it is expected that amortisation expense (impairment losses) will be
negatively related to returns. Table VIII shows the exact relationship between returns
and amortisation expense (impairment losses) for both tangible and intangible
assets. The correlations are both negative (0.11782 and 0.1517) and significant.
The correlations between independent variables are also checked, and there is no
evidence of multicollinearity.
5.3 Multivariate analysis
The overall results of the multiple regressions are reported in Panel A of Table IX. Model
1 in Panel A shows that capitalised intangibles are positively and significantly related to
share prices. For the whole sample, the coefficient of ITA is 1.06746 ( po0.0001), meaning
that market price will increase by 1.0674 in the Australian dollar with every one dollar of
capitalised intangibles. This result supports our H1 and indicates that capitalised
intangible assets are value relevant. The result also shows EBIT is value relevant and
with a dollar increase in EBIT, the market price will increase by 4.6406 in Australian
dollars. This can be interpreted as the earnings on the income statement having more
information content than the intangibles on the balance sheet. Model 2 in Panel A of
Table IX shows that both goodwill and other identifiable intangibles are value relevant.
For the whole sample, the coefficient of goodwill (GW) is 1.1831 ( po0.0001) and the
coefficient of NGW is 0.3372 ( po0.0001). Goodwill is more value relevant than the other
identifiable intangibles. Therefore, H1a and H1b are supported.
The market is expected to be sensitive to the tangibility (a proxy for the
measurement of value reliability) of a firms assets. Therefore, we divide the sample
into two sub-groups according to the tangibility of the assets. In line with our
expectations, the coefficient of (TTA-TL) is 0.5881 in Model 1 which is positive and
statistically significant if firms have a positive tangibility ratio (TTA-TL40).
However, market reaction is negative (coefficient of (TTA-TL) is 0.2456, po0.0001) if
firms net tangible assets are o0 (TTA-TLo0).
The results in Panel A of Table IX show that markets can see through the cosmetic
make-up if firms want to inflate their total assets by increasing the weight of
intangibles. Capitalising intangibles does increase a firms value but varies according
to the degree of a firms tangibility of assets. According to Model 1, the coefficient of
intangible assets is 1.2614 and statistically significant for the firms that have a positive
measurement of tangibility (TTA-TL40), but the coefficient decreases to 0.4868
( po0.0001) if the measurement of tangibility is negative (TTA-TLo0). Those results

0.0000
0.0000
0.0000
0.0000

0.0000
0.0000
0.0000
0.0000

0.0000
0.0000

1.0584
0.5881
1.2614
3.64873
0.5035
0.5032
1682.5470
0.0000
0.3191
4,982
0.5654
1.1901
1.7134
2.1340
0.5857
0.5850
864.5706
0.0000
0.3784
1,839
1.0226
1.0404

0.8176
0.0230

3.3054
0.6299
0.6275
265.4546
0.0000
0.4275
475

0.8564
0.3645
0.9663

5.3030
5.3030
5.3030
717.6207
0.0000
0.4445
1,568

0.8931
0.2456
0.4868

0.0000
0.5192

0.0000

0.0000
0.0000
0.0000

0.0000

0.0000
0.0000
0.0000

Model 1 (dependent variable: MV)


All sample
TTA-TL40
TTA-TLo0
Coeff.
Prob.
Coeff.
Prob.
Coeff.
Prob.

Panel A: full sample period 2000-2009


C
1.1621 0.0000
TTA-TL
0.1160 0.0000
ITA
1.0674 0.0000
GW
NGW
EBIT
4.6406 0.0000
R2
0.4874
Adjusted R2
0.4871
F-statistic
2074.3180
Prob (F-statistic)
0.0000
Durbin-Watson stat
0.2740
Observations
6,550
Panel B: pre-adoption period 2001-2003
C
1.0164 0.0000
TTA-TL
0.0969 0.0005
ITA
1.2644 0.0000
GW
NGW
EBIT
4.6224 0.0000
R2
0.5149
Adjusted R2
0.5143
F-statistic
817.4263
Prob (F-statistic)
0.0000
Durbin-Watson stat
0.2463
Observations
2,314
Panel C: post-adoption period 2006-2009
C
1.1428 0.0000
TTA-TL
0.3674 0.0000

Models
Variables

0.0000
0.0000

0.0000
0.0000
0.0000

2.3258
0.6613
4.0442
0.5701
0.5693
765.4609
0.0000
0.3579
2,314
1.2667
0.3597

0.0000
0.2782

0.0000
0.0000
0.0000

1.1831
0.3372
4.7717
0.4814
0.4811
1519.1450
0.0000
0.2850
6,550
0.9836
0.0288

0.0000
0.0000

1.2490
0.1102

1.0876
1.1178

2.5684
1.0802
2.0038
0.6296
0.6288
727.6861
0.0000
779.2556
1,839

0.5237
1.1609

1.0758
0.8993
3.8615
0.4919
0.4915
1204.5440
0.0000
0.3203
4,982

1.0958
0.6182

0.0000
0.0000

0.0000
0.0000
0.0000

0.0000
0.0000

0.0000
0.0000
0.0000

0.0000
0.0000

0.0000
0.6007
0.0000

0.0000
0.0000
0.0000
0.0000
0.0000

0.0000
0.7419

0.6364
0.0486
5.4421
0.5794
0.5783
537.2824
0.0000
0.4516
1,568
0.8742
0.2952
1.7708
0.7686
2.5300
0.6702
0.6673
237.2169
0.0000
0.4379
475
0.9256
0.0119

(continued )

0.0000
0.0000

1.0303
0.2351

Model 2 (dependent variable: MV)


All sample
TTA-TL40
TTA-TLo0
Coeff.
Prob.
Coeff.
Prob.
Coeff.
Prob.

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Value relevance
and reliability of
intangible assets
203

Table IX.
Regression results
of price models

Table IX.
0.0000
0.0000

1.0397

4.5314
0.5003
0.4998
976.6646
0.0000
0.3623
2,930

2.9767
0.5138
0.5131
746.7840
0.0000
0.4203
2,124

1.2751
0.0000

0.0000
6.8941
0.6384
0.6371
472.0426
0.0000
0.8497
806

0.2140
0.0000

0.0082
0.9455
0.3018
4.7977
0.4859
0.4852
691.2106
0.0000
0.3631
2,930
`

0.0000
0.0269
0.0000

0.8429
1.0073
3.2549
0.4955
0.4946
520.3072
0.0000
0.4101
2,124

0.0000
0.0000
0.0000

0.3023
0.4421
7.2060
0.6425
0.6407
359.8262
0.0000
0.8955
806

0.0035
0.0011
0.0000

Model 2 (dependent variable: MV)


All sample
TTA-TL40
TTA-TLo0
Coeff.
Prob.
Coeff.
Prob.
Coeff.
Prob.

Notes: MV, Market value of equity at the end of three months after financial year; TTA, total tangible assets total fixed assets total current assets;
TL, total liabilities; TTA-TL, total fixed assets total current assets total liabilities total fixed assets working capitals long-term liabilities;
ITA, intangible assets; GW, goodwill; NGW, other identifiable intangibles (or intangible assets other than goodwill); EBIT, earnings before interest and tax.
All variables are scaled by number of ordinary shares

ITA
GW
NGW
EBIT
R2
Adjusted R2
F-statistic
Prob (F-statistic)
Durbin-Watson stat
Observations

Model 1 (dependent variable: MV)


All sample
TTA-TL40
TTA-TLo0
Coeff.
Prob.
Coeff.
Prob.
Coeff.
Prob.

204

Models
Variables

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indicate that for firms possessing good quality assets (more tangibles) a one-dollar
increase in intangible assets will be transformed into a 1.2614 dollar increase in that
firms value. For firms with softer assets (less tangible), the market value only
increases by 0.4868 for each dollar invested in intangibles. The t-test shows that the
coefficient of 1.2614 for the firms with TTA-TL40 is statistically significant higher
than the coefficient of 0.4868 for the firms with TTA-TLo0 (t 8.8632, po0.0001).
This result validates H2, and means that intangible assets do have more incremental
explanatory power if they are perceived as being more reliable.
Model 1 in Panel A of Table IX also shows that earnings before income tax (EBIT) is
positively and significantly correlated with a firms value regardless of the types of
firm. However, earnings before income tax (EBIT) is more informative for firms when
having a negative measurement of tangibility. The possible explanation for this result
is that because the information on the balance sheet is less relevant and reliable for
firms that possess softer assets, investors have turned to the income statement for
more information.
The results for Model 2 in Panel A of Table IX show that the coefficient of GW is
1.0758 for firms having a positive measurement of tangibility (TTA-TL40), while the
coefficient of just 0.6364 is still positive and is statistically significant for firms having
a negative measurement of tangibility (TTA-TLo0). The one-tailed t-test shows that
these two coefficients are statistically and significantly different (t 19.1024, po0.0001).
This result confirms H2a. For businesses with a positive measurement of tangibility,
the coefficient of other identifiable intangibles is 0.8993, which is positive and significant;
while the coefficient of other identifiable intangibles is negative and insignificant for
those firms having a negative measurement of tangibility. Consequently, the result
supports H2b. This result also sends a warning signal to those firms which hold softer
tangible assets (TTA-TLo0) because the market is not impressed by attempts to inflate
total assets through other intangibles, such as capitalising brands, licenses and rights.
The impacts of adopting IFRS on a firms reporting behaviour in regard to
intangibles are presented in Panels B and C of Table IX. The result for the pre-adoption
period appears in Panel B while the result for the post-adoption period is shown in
Panel C. According to Model 1, for the whole sample, the informativeness of earnings
has not changed significantly over time. However, when the sample is divided into two
different groups according to firms tangibility, it can be seen that the coefficients
of EBIT for both types of companies (TTA-TL40 and TTA-TLo0) increase from
2.1340 and 3.3054 in the pre-adoption period to 2.9767 and 6.8941 in the post-adoption
period, respectively (one-tailed t-tests show that the increases in the coefficients are
statistically significant at 1 per cent). Similar results are reported for Model 2 where
intangibles are classified into goodwill and other identifiable intangibles.
The most important finding in our research is that the value relevance of intangible
assets decreases after the adoption of IFRS. For the whole sample, the coefficient of
intangibles is 1.2644 in the pre-adoption period and it reduces to 1.0397 in the
post-adoption period (see Model 1 in Panels B and C in Table IX). Such a decrease
is statistically significant based on the t-test (t 2.3530, po0.0095). Therefore H3 is
not supported. When partitioning the sample into two sub-groups, the results in Panels
B and C of Table IX show that for the firms which have a positive measurement of
tangibility (TTA-TL40), the coefficient of intangible assets (ITA) decreases from
1.7134 in the pre-adoption period to 1.2751 in the post-adoption period in Model 1.
For the firms that have a negative measurement of tangibility (TTA-TLo0), the
coefficient of intangible assets (ITA) decreases from 0.9663 in the pre-adoption period

Value relevance
and reliability of
intangible assets
205

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206

to 0.2143 in the post-adoption period in Model 1. t-tests reveal such reductions are also
statistically significant.
H3a and H3b are tested by comparing the results of Model 2 in Panels B and C of
Table IX. For the whole sample, the coefficient of GW decreases from 2.3258 in the preadoption period to 0.9455 in the post-adoption period. The coefficient of the other
identifiable intangibles (NGW) also decreases from 0.6613 to 0.3018 over time. All
changes in the coefficients are statistically significant. Therefore, H3a and H3b cannot
be supported. When dividing firms according to the measurement of tangibility,
decreasing trends are found for both types of firms: firms with a positive measurement
of tangibility, and firms with a negative measurement of tangibility. These results
provide strong evidence for rejecting H3. This may be explained by the fact that the
new accounting standard for intangibles becomes more stringent on capitalising
intangible assets. Some intangible assets, such as internally generated brands and
goodwill, are no longer permitted to be capitalised after adopting the new IFRS.
Because less intangible assets are allowed to be capitalised, this makes information
about intangibles became less value relevant.
Finally, we test H4 and investigate whether the relationship between value
relevance and value reliability has changed in the post-adoption period. According to
the results of Model 1 in Panel C of Table IX for the post-adoption period, the coefficient
of the intangible is 1.2751 which is statistically significant for firms with a positive
measurement of tangibility (TTA-TL40), while the coefficient of the intangible is only
0.2140 for firms with a negative measurement of tangibility (TTA-TLo0). The one
tailed t-test shows that the coefficient of 1.2571 is statistically and significantly greater
than the coefficient of 0.2140 (t 8.7543, po0.0001). Similar results are also found for
the coefficients for goodwill and the other identifiable intangible assets in Model 2.
These results support the proposition that the more reliable information is about
intangibles the more value relevant it is, and this still holds true in the post-adoption
period. The adoption of IFRS has not changed the positive and complimentary
relationship between value relevance and value reliability, supporting H4.
5.4 Additional tests
In the main tests in Table IX, we investigate whether a firms behaviour in capitalising
intangible assets has been affected by the nature of the assets possessed by the firm, or
by whether the firms assets are solid or soft. Previous studies have shown that firms
may have other, different incentives for capitalising intangibles, e.g. to avoid a breach
of debt covenants; to improve financial performance; to signal that firms have a higher
earnings quality (Kallapur and Kwan, 2004; Wyatt, 2005). In Table X, we use another
measure of value reliability, the long-term leverage ratio, to test whether a firms
behaviour in capitalising intangibles is affected by its leverage. The long-term leverage
ratio is calculated by using long-term debts divided by total assets. We partition our
sample into two equal-sized sub-groups according to the median of long-term leverage
ratio. We argue that the capitalised intangibles in firms with lower long-term leverage
are more reliable because these firms have less incentive to inflate intangibles to avoid
a breach of the debt covenant restrictions or to improve their borrowing capacity.
As hypothesised before, value reliability leads to value relevance; we expect the
value relevance of capitalised intangibles to be higher, also, in these firms with a lower
long-term leverage.
The results of Model 1 in Table X show that the coefficient of capitalised intangibles
for firms with a higher long-term leverage is 0.3076 while the coefficient of capitalised

0.0000
0.0000
0.0000
0.0000

1.1621
0.1160
1.0674

4.6406
0.4874
0.4871
2,074.3180
0.0000
0.2740
6,550

6.3812
0.5866
0.5862
1,547.0310
0.0000
0.4659
3,275

1.1626
0.0812
0.3076
0.0000

0.0000
0.0002
0.0000
2.7205
0.4239
0.4234
802.2310
0.0000
0.3888
3,275

0.7031
0.7663
2.8276
0.0000

0.0000
0.0000
0.0000

Model 1 (dependent variable: MV)


All sample
LEV4Median
LEVoMedian
Coeff.
Prob.
Coeff.
Prob.
Coeff.
Prob.
0.0000
0.0000
0.0000
0.0000
0.0000

1.2490
0.1102
1.1831
0.3372
4.7717
0.4814
0.4811
1,519.1450
0.0000
0.2850
6,550

0.1867
0.0027
6.6833
0.5835
0.5830
1,145.1210
0.0000
0.4802
3,275

1.2324
0.0995

0.0058
0.9741
0.0000

0.0000
0.0000

0.0000
0.0000
0.0000
0.0000
0.0000

0.7563
0.7050
3.3298
1.0309
2.9018
0.4324
0.4317
622.8661
0.0000
0.4100
3,275

Model 2 (dependent variable: MV)


All sample
LEV4Median
LEVoMedian
Coeff.
Prob.
Coeff.
Prob.
Coeff.
Prob.

Notes: MV, Market value of equity at the end of three months after financial year; TTA, total tangible assets total fixed assets total current assets;
TL, total liabilities; TTA-TL, total fixed assets total current assets total liabilities total fixed assets working capitals long-term liabilities;
ITA, intangible assets; GW, goodwill; NGW, other identifiable intangibles (or intangible assets other than goodwill); EBIT, earnings before interest and tax.
All variables are scaled by number of ordinary shares

C
TTA-TL
ITA
GW
NGW
EBIT
R2
Adjusted R2
F-statistic
Prob (F-statistic)
Durbin-Watson stat
Observations

Models
Variables

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Value relevance
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Table X.
Regression results of price
models (sample divided
according to the ratio of
long-term leverage)

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208

intangibles for firms with a lower long-term leverage is 2.8276. This result indicates
that intangible assets are more value relevant in firms with a lower long-term leverage.
The one tailed t-test shows the difference between the two coefficients is statistically
significant (t 25.2501, po0.0001). When separating total intangible assets into two
different categories: GW and other identifiable intangibles (NGW) in Model 2, the
coefficient of capitalised GW for firms with a higher long-term leverage is only 0.1867
while the coefficient of capitalised GW for firms with a lower long-term leverage is
3.3298. The coefficient of capitalised other identifiable assets (NGW) for firms with a
higher long-term leverage is not even significant. The results in both Models 1 and 2 in
Table X show a negative relationship between value relevance and leverage. This can
be interpreted as being indicative that a firms behaviour in capitalising intangible
assets is also affected by the firms debt covenants and financial structures. These
results also provide strong support for H2 that the more reliable information is about
intangibles, the more value relevant it becomes.
In the second additional test (Table XI), we test the value relevance of amortisation
expense (or impairment losses in IFRS) of intangibles in the return models. As
amortisation expenses (or impairment losses) will reduce a firms earnings and, in turn,
reduce the companys equity, it is expected that a negative relationship will exist between
returns and the amortisation expense (or impairment losses) of intangibles. In Model 3, we
test the value relevance of amortisation expense (or impairment losses) of intangibles and
in Model 4, we sub-divide total amortisation expense (or impairment losses) of intangibles
into amortisation expense (or impairment losses) of capitalised goodwill and amortisation
expense (or impairment losses) of other identifiable intangibles. Then we investigate
whether each type of amortisation expense (or impairment losses) is value relevant:
RETURNit b0 b1 EBITAit b2 D EBITAit  b3 AMORITAit
 b4 AMORTTAit eit
RETURNit b0 b1 EBITAit b2 D EBITAit  b3 AMORGWit
 b4 AMORNGWit  b5 AMORTTAit eit

3
4

where RETURN is the return of equity for 12-month period ended three months
after financial year; EBITA the earnings before interest, tax and amortisation
(impairment); DEBITA the change of earnings before interest, tax and
amortisation (impairment); AMORITA the amortisation expense (impairment losses)
of intangible assets; AMORTTA the amortisation expense (impairment losses) of
tangible assets; AMORGW the amortisation expense (impairment losses) of goodwill;
and AMORNGW the amortisation expense (impairment losses) of intangible assets
other than goodwill. All variables other than RETURN are scaled by total equity.
The results in Table XI show that for the whole sample, both earnings before
interest, tax and amortisation (impairment) and change of earnings before interest, tax
and amortisation (impairment) are positively and significant related to returns.
Amortisation expense (or impairment losses) of intangible and tangible assets are
negatively and significantly associated with returns. When partitioning the sample
according to the measurement of tangibility, the results in Model 3 show that the
coefficient for amortisation expense (or impairment losses) of intangibles is 0.4011
for firms with a positive measurement of tangibility (TTA-TL40), the coefficient for
amortisation expense (or impairment losses) of intangibles is 0.2270 for firms with a
negative measurement of tangibility (TTA-TLo0), and that the difference between these

0.0000
0.0000
0.0848
0.0000
0.0000

0.0871
0.0761
0.0080
0.3172

0.3258
0.0679
0.0672
92.7349
0.0000
1.7696
5,094

0.3160
0.0702
0.0694
83.7290
0.0000
1.7032
4,438

0.0664
0.0658
0.0386
0.4011
0.0000

0.0000
0.0002
0.0001
0.0000
1.9752
0.1058
0.1003
19.2572
0.0000
1.5615
656

0.1964
0.0887
0.0012
0.2270
0.0001

0.0000
0.0176
0.8360
0.0002

Model 3 (dependent variable: RETURN)


All sample
TTA-TL40
TTA-TLo0
Coeff.
Prob.
Coeff.
Prob.
Coeff.
Prob.
0.0000
0.0000
0.0105
0.0000
0.0000
0.0000

0.0741
0.0785
0.0096
0.1731
0.9304
0.3034
0.0786
0.0777
86.8069
0.0000
1.7777
5,094

0.2345
0.7922
0.3009
0.0743
0.0732
40.6384
0.0000
71.0965
4,438

0.0606
0.0664
0.0371

0.0004
0.0000
0.0000

0.0000
0.0000
0.0004

0.0000
0.0008
0.6029
0.1242
0.0000
0.0000

0.1558
0.1268
0.0030
0.1012
1.0118
1.9140
0.1357
0.1290
20.4038
0.0000
1.5618
656

Model 4 (dependent variable: RETURN)


All sample
TTA-TL40
TTA-TLo0
Coeff.
Prob.
Coeff.
Prob.
Coeff.
Prob.

Notes: RETURN, Return of equity for 12-month period ended three months after financial year; EBITA, earnings before interest, tax and amortisation;
DEBITA, change of earnings before interest, tax and amortisation (impairment); AMORITA, amortisation expense (impairment losses) of intangible assets;
AMORTTA, amortisation expense (impairment losses) of tangible assets; AMORGW, amortisation expense (impairment losses) of goodwill; AMORNGW,
amortisation expense (impairment losses) of intangible assets other than goodwill. All variables other than RETURN are scaled by total equity

C
EBITA
DEBITA
AMORITA
AMORGW
AMORNGW
AMORTAN
R2
Adjusted R2
F-statistic
Prob (F-statistic)
Durbin-Watson stat
Observations

Models
Variables

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Value relevance
and reliability of
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209

Table XI.
Regression results
of return models

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210

two coefficients is also statistically significant. This result means amortisation expense
(or impairment losses) of intangibles is more value relevant if the firms information about
it is more reliable. Therefore H2 is also valid in return models. In Model 4 of Table XI,
we investigate the value relevance of the different types of amortisation expense
(or impairment losses) of intangibles, e.g. goodwill vs other identifiable intangibles.
The results show that both amortisation expense (or impairment losses) of goodwill and
amortisation expense (or impairment losses) of other identifiable intangibles are value
relevant. Both coefficients are negative and significant. When comparing value relevance
between two sub-samples according to the measurement of tangibility, only the coefficient
of amortisation expense (or impairment losses) of goodwill for the group with TTA-TL40
is statistically significant. The coefficient of amortisation expense (or impairment losses)
of goodwill for the group with TTA-TLo0 is not significant which means it is not value
relevant. In addition, a t-test shows that the difference between the coefficients of
amortisation expense (or impairment losses) of other identifiable intangibles for the two
sub-samples is not significant. In summary, the positive relationship between value
relevance and value reliability is still held in the return models. The more reliable is
information about intangibles, the more relevant is such information.
In the final additional test, we investigate whether notional capitalised R&D
expenditure is value relevant. The major change brought about by harmonisation of
accounting standards in Australia is that research expenses were no longer allowed to
be capitalised after 2005. However, previous studies have shown that capitalised
R&D expenditure can reduce information asymmetry, and improve value relevance
(Boone and Raman, 2001; Mohd, 2005; Aboody and Lev, 1998; Oswald and Zarowin,
2007; Abrahams and Sidhu, 1998). Therefore, we assume that R&D costs had been
capitalised instead of being expensed and add a variable of RD in Model 5. RD refers to
notional capitalised R&D costs, deflated by the number of shares. If notional capitalised
R&D expenditure is value relevant, then a3 in Model 5 will be significantly 40:
MVit a0 a1 TTAit  TLit a2 ITAit a3 RDit a4 EBITit eit

The results in Table XII show that notional capitalising R&D expenditure is positively
and significantly associated with a firms value (coefficient 9.2651, po0.0001). This
significant result means if R&D expenditure had been capitalised, it could be value
relevant. This result suggests that R&D expenditure should be capitalised and
recognised as an intangible asset on the balance sheet rather than being expensed
immediately because investors value such information about R&D and this information
can help them to make rational economic decisions. We also investigate whether value
relevance of R&D expenditure depends on the measurement of tangibility. The results in
Table XII show that firms with a negative measurement of tangibility have a higher
coefficient than firms with a positive measurement of tangibility. This means
capitalising R&D expenditure is more critical for firms if their assets are softer or if the
information about intangibles is less reliable.
6. Conclusion
This paper investigates the impact of value reliability of reported intangible assets on
their value relevance. It shows that value reliability is complementary to value
relevance. Intangible assets are more value relevant in firms where it is presumed that
information about intangibles is more reliable. This finding is consistent for both the
pre-adoption and post-adoption periods.

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Models
Variables
C
TTA-TL
ITA
RD
EBIT
R2
Adjusted R2
F-statistic
Prob (F-statistic)
Durbin-Watson stat
Observations

Model 5 (dependent variable: MV)


All sample
TTA-TL40
TTA-TLo0
Coeff.
Prob.
Coeff.
Prob.
Coeff.
Prob.
1.1348
0.0977
1.0110
9.2651
4.5001
0.4950
0.4947
1,603.8900
0.0000
0.2783
6,550

0.0000
0.0000
0.0000
0.0000
0.0000

1.0414
0.5791
1.2032
5.6621
3.5630
0.5063
0.5059
1,276.1710
0.0000
0.3158
4,982

0.0000
0.0000
0.0000
0.0000
0.0000

0.8685
0.2454
0.4369
16.7237
5.2321
0.6022
0.6012
590.4139
0.0000
0.4765
1,565

0.0000
0.0000
0.0000
0.0000
0.0000

Value relevance
and reliability of
intangible assets
211

Notes: MV, Market value of equity at the end of three months after financial year; TTA, total tangible
assets total fixed assets total current assets; TL, total liabilities; TTA-TL, total fixed assets
total current assets total liabilities total fixed assets working capitals long-term liabilities;
Table XII.
ITA, intangible assets; RD, capitalised research and development expenditure; EBIT, earnings before Regression results of price
interest and tax. All variables are scaled by number of ordinary shares
models for R and D

The paper reveals that the value relevance of capitalising intangible assets in both
aggregate and individual groups, concerns goodwill and other identifiable intangibles.
The results indicate that an intangible asset is generally value relevant for Australian
firms. However, capitalisation of goodwill and other identifiable intangibles has different
value relevance for different types of firms. The value relevance of goodwill is higher in
firms with a positive measurement of the tangibility of assets than in firms with a
negative measure. The value relevance of other identifiable intangibles is also higher in
firms with a positive measurement of the tangibility of assets than firms with a negative
measurement of the tangibility of assets. Therefore, it suggests that intangible assets are
more value relevant in firms for which information is more reliable.
The paper also examines the impact of adopting IFRS on the value relevance of
intangible assets in Australia. Results from our study show that the value relevance
of intangible assets has declined since the commencement of IFRS. As requirements for
capitalising intangibles become more rigorous, certain types of intangibles are no longer
reported on balance sheets. These types of intangible assets, for example development
costs, brands, mastheads and internally generated goodwill, have long been argued as
constituting the most valuable assets for firms generally. The failure to recognise these
types of intangibles may contribute to the decline of value relevance of capitalised
intangibles in the post-adoption period. The paper also contends that even in the situation
where value relevance of intangibles has declined, the complementary nature of value
relevance and reliability has not changed after the adoption of the new IFRS.
This paper has made new contributions to the existing literature on intangible
assets. First, it is only one of a few studies to have investigated the impact of the
reliability of information about intangibles on the value relevance of intangible assets.
The fact that value relevance and reliability complement each other has been
documented and supported by our results. Second, the empirical testing models used in
this paper have been derived from the proven Ohlson models. Both the price and
return models consistently support the claim that capitalisation and amortisation
(or impairment) of intangibles are value relevant to a firms values. Finally, the results

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212

show that a firms behaviour in terms of capitalising and amortising (or impairment)
unidentifiable intangibles (goodwill), and other identifiable intangibles has changed
significantly after the adoption of IFRS. But the proposition that the reliable measurement
of intangibles can enhance the value relevance of intangibles is still valid.
One limitation of this study is that only one new measurement of value reliability
(tangibility) is used in our main tests. There may be other incentives for firms to capitalise
intangibles. Future research can use other proxies to measure value reliability, such as
examining whether more conservative firms are less likely to capitalise intangibles,
whether a growth firm with more investment opportunities is more willing to show
intangibles on its balance sheet or whether the intangible assets are more value relevant
in the firms which have better corporate governance structures or have been audited by
big four audit firms.
The results of this study provide some useful information for accounting regulators on
how to improve current accounting standards for intangibles. Accounting regulators need
to balance value relevance and reliability in determining the level of information on
intangibles that needs to be disclosed by firms. Stock exchanges, analysts, academics and
investors can learn from this study how to understand the role of accounting numbers
in different circumstances, particularly the relationship between value relevance and
reliability. Furthermore, such information can also be useful to professional bodies in
lobbying standard setters in relation to contentious accounting issues such as accounting
for goodwill, brand names, R&D and other identifiable intangible assets.
The fact that the value relevance of intangibles varies according to the level of their
aggregation and according to the different types of firms implies that the adoption of
new IFRS rules for intangible assets has not yet solved the problem of how to measure
and report intangible assets. Moreover, it will remain as a controversial topic because
not all intangible assets are reported by firms even after they have embraced IFRS.
If investors are not informed as to the true value of intangible assets, it becomes
difficult for them to make appropriate economic decisions. Therefore, a comprehensive
reporting framework for intangible assets is needed (Lev, 2003). Both the value relevance
and reliability of information about intangibles are issues that need to be addressed
and balanced in the new framework.
Notes
1. Both reliability and value reliability have the same meaning and they are used
interchangeably in the paper. These two terms all refer to how reliable is the reported
financial information, particularly the information about the intangible assets. In order
to avoid repetition, the term the value relevance and the value reliability is phrased as
the value relevance and reliability.
2. Dahmash et al. (2009) measure reliability of reported intangibles by assessing whether the
coefficients of intangibles are close to one. They argue that the coefficient of a reliably
estimated accounting item, under the pure fair value (market) valuation system, should equal
1. If the coefficients of accounting items are significantly different from 1, this means the
market does not view these variables as representing reliable estimates of fair value.
3. Kallapur and Kwan (2004) use two proxies for contracting incentives for capitalising
brands: whether brand capitalisation needs be approved by shareholder; whether firms
debt-to-equity ratio is above the industry-adjusted sample median.
4. This research is an examination of ten years application of SFAS No. 86. It is also a response
to the petition by The Software Publishers Association to abolish this standard and require
all software development costs to be charged to expense (Aboody and Lev, 1998).

5. Lev (2003) stated that there are four approaches to valuing a companys investment
in intangibles: first, based on accounting for the investments in R&D, brand names
and others; second, using wages and salaries paid to employees who create intangibles;
third, examining the changes in operating margins the difference between sales and
cost of sales. The main reason for this approach is that if there is an improvement in
reported gross margin, it must be to document the value derived from intangibles,
e.g. innovation in enhancing production efficiency, employing more skilled workers
and improving the quality of products; and fourth, comparing the differences between
the market values of companies to their book values. The unrecorded value reflects the value
of intangible assets.

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6. Wyatt (2008) argues that reliability information is secondary to the issue of relevance.
7. The basic econometric equation of the price model is as follows:
MVit a0 a1 TTAit a2 TIAit  a3 TLit a4 EBIT it
Because TTA and TL are highly correlated, we combine these two variables into one
variable of TTA-TL to avoid the problem of multicolinearity (Tabachnick and Fidell, 2007).
Then we have the equation below which is used as Model 1 in our paper:
MVit a0 a1 TTAit  TLit a2 TIAit a3 EBIT it
8. We notice that the measurement of (TTA-TL) is not a ratio, but that the leverage is a ratio.
In order to compare these two measurements, we need to covert (TTA-TL) into a tangibility
ratio by deflating it over TA.
9. In the USA the estimated amount of intangibles was around US$1 trillion
in 2000. This amount was almost equivalent to all investment in fixed assets for
that year.
10. This further indicates that intangible assets became more important components in the
assets. The firms with the highest percentage of intangibles over total assets were
the Austereo Group, with 90 per cent in 2004, and ABC Learning Centres with 80 per cent
in 2005.
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pp. 22-38.

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Corresponding author
Dr Xu-Dong Ji can be contacted at: x.ji@latrobe.edu.au

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