Accounting discretion and purchase price allocation after acquisitions

Ivy Xiying Zhang, Yong Zhang

Research output: Contribution to journalArticlepeer-review

6 Scopus citations


The recent movement in standards setting toward fair-value-based accounting beyond financial assets and liabilities calls for more empirical evidence on fair-value measurement, especially that of intangible assets. This article studies the initial valuation of goodwill and identifiable intangible assets after acquisitions. We find that the allocation of purchase price to goodwill and identifiable intangible assets is related to the economic determinants of the valuation. However, it is also significantly affected by managerial incentives arising from the differential treatments of goodwill and identifiable intangible assets under Statement of Financial Accounting Standards (SFAS) 142. The same managerial discretions are not exhibited in the purchase price allocation prior to SFAS 142, when goodwill and other intangibles are both amortized. These findings suggest that unverifiable fair value measures are associated with the underlying economics but also deviate from the true values in the presence of management reporting incentives. Further analysis suggests that external appraisers constrain managerial discretion in intangible asset valuation to an extent but do not completely eliminate it.

Original languageEnglish (US)
Pages (from-to)241-270
Number of pages30
JournalJournal of Accounting, Auditing and Finance
Issue number2
StatePublished - Apr 2017

Bibliographical note

Funding Information:
The authors appreciate the helpful comments and suggestions from Bharat Sarath (the Editor), an anonymous referee, Mary Barth, Hemang Desai, Richard Frankel, Rebecca Hann, Clive Lennox, Antonio Marra, Karthik Ramanna, Ross Watts, Jerry Zimmerman, and seminar participants at the University of Minnesota Mini Conference on Empirical Research, Hong Kong University of Science and Technology (HKUST), and the University of Southern California. They also thank Fang Wan and Junqi Zou for their excellent research assistance.

Publisher Copyright:
©The Author(s) 2015.


  • Fair-value accounting
  • Goodwill
  • Intangible assets
  • SFAS 142


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