Regulatory Changes in Accounting for Goodwill and Intangible Assets: A Study of Their First Impact on European Companies Listed on US Markets

In July 2001 the US Financial Accounting Standards Board (FASB) issued the Statement of Financial Accounting Standard (SFAS) no. 141 on Business Combinations and the Statement no. 142 on Goodwill and Other Intangible Assets. Prior to the issuance of SFAS 141, business combinations were to be accounted for using one of the two methods prescribed by the APB Opinion no. 16, that allowed the use of either the pooling-of-interests method or the purchase method. Following the new US rules, business combinations are now to be accounted for using only the latter method. Further, a detailed breakdown of goodwill into its component intangibles is now required. SFAS 142 has been issued to supersede APB Opinion no. 17 on Intangibles. It requires goodwill to be no longer amortised but subject to an annual two-step impairment test. Accordingly, intangibles with finite useful lives will still be capitalised and amortised over their economic useful life, while intangible assets with indefinite lives will be tested annually for impairment. The standard also requires an increased disclosure on goodwill and intangible assets that was not previously required. The aim of the study is to analyse the impact these regulatory changes are producing on net income and shareholders’ equity of European companies listed on US financial markets that for the first time in 2002 had to prepare their consolidated accounts according to these two new standards, due to the requirement imposed by the Securities and Exchange Commission (SEC) on foreign registrants to reconcile their annual accounts with US Generally Accepted Accounting Principles (GAAP). The relevance of this topic is linked to the prospective adoption by the International Accounting Standards Board (IASB) of an approach to accounting for goodwill which should be similar to the new US rules. As a consequence of the 2002 EU regulation requiring the use of International Financial Reporting Standards (IFRS) by the listed European companies for their consolidated accounts from 2005, the above US rules will then de facto become extended also to the EU context. The empirical analysis considers all the 292 European companies listed on Nyse and Nasdaq preparing a reconciliation - included in the so called Form 20-F - between their domestic and the US-based financial results. The methodology followed uses the comparability index (Gray, 1980; Weetman and Gray, 1990, 1991) both in its global and partial version. In addition to the measurement of the quantitative impact of the new US standards on European companies’ financial results, an examination of the statistical distance on this subject matter between US GAAP and IFRS will also be offered. The expectation of an alignment between US GAAP and other national accounting principles taken into consideration is partially confirmed, particularly between US and UK GAAP. A further contribution of the paper is the analysis of the amount of disclosure released by European companies in US markets with reference to the new treatment of goodwill and its component parts.