The usefulness of intangible assets’ disclosure for financial analysts. Insights from Purchase Price Allocation conditional on deal quality

Newly acquired intangibles in business combinations must be fully recognized (FASB 2001). We examine the relevance for financial analysts of disclosures about intangible assets following business combinations. Accounting for intangible assets is the subject of a debate between advocates of additional disclosures and recognition and defenders of the current mainly voluntary disclosure regime with limited recognition. We aim to contribute to this debate. We use a hand-collected sample of 447 purchase price allocations for material transactions completed between 2002 and 2011 in the US. We investigate the effects of intangible-related disclosures on revisions of analysts? earnings forecasts. We sequentially test the impact of the aggregate level of disclosures on intangibles assets and of each component of an intangible-related disclosure score, conditional on the deal?s quality. We show that disclosures are positively associated with the magnitude of analysts? forecast revisions, particularly for deals that were negatively received by market participants when initially announced (Bad Deals). Some individual components of disclosure are incrementally informative for financial analysts, such as the disclosure of separately identified intangible assets and information about their amortization. Goodwill is associated with downward revisions of analysts? earnings forecasts, and confirms that goodwill is interpreted by analysts as informative about the extent of overpayment. Overall, our results indicate that the disclosures of newly acquired intangibles convey relevant information to financial analysts.