Goodwill Accounting by Pharmaceutical Companies: Assessing Reporting Informedness and Value Relevance After SFAS 142

• In Event: Emerging Research and Research Interaction 4

Abstract

Companies in the pharmaceutical sector add value for owners and grow in somewhat unique ways. In addition to volume and product-price increments, the largest companies in this industry have a penchant for acquiring other firms, buying product lines, and purchasing in-process research and development. Non-organic growth through acquisition often is manifested on drug company balance sheets through large goodwill valuations.

When the Financial Accounting Standards Board (FASB) proposed movement away from the commonly used pooling of interest accounting for business combinations and the arbitrary 40-year amortization of goodwill, the promise was that financial reporting would improve and that better decision-relevant information would be generated. Having a sizeable number of homogeneous companies in a single high-tech type industry provides a special opportunity to assess whether—15 years after implementation—Statement of Financial Accounting Standards (SFAS) 142 has brought about outcomes that validate the initial claim made by the FASB. By observing the goodwill amortization and impairment charges in the pre- and post-SFAS 142 periods, an assessment can be made regarding informedness and the value relevance of the financial accounting/reporting.

Typically, empirical researchers have used unexpected price changes as a measure of the information content in public disclosures. Certainly, the SFAS 142 change from pro-rata absorption of the goodwill intangible asset to abrupt impairment write-off after negative valuation determination would seem to be an excellent case to test whether accounting model alteration was a step forward in the provision of decision-relevant data. The current research project intends to make that determination by developing a partially revealing rational expectations model of stock price behavior for all the nearly 400 publicly traded firms in SIC 2834—Pharmaceutical Preparations.

This research has practical usefulness. In an era when fair value determination is important to statement users, knowing whether the accounting treatment for an inherently difficult to judge asset like goodwill is of assistance will be valuable. The outcome of this empirical project should help regulators understand the consequences of their rule-making processes.

Authors

• Anthony DelConte, Saint Joseph's University

• George P Sillup, Saint Joseph's University

• A J Stagliano, Saint Joseph University