Accounting for intangible assets, firm life cycle and the value relevance of intangible assets

This study examines the relationship between accounting choice for intangible assets and their value relevance as well as the moderating effect of firm life cycle on this relationship, in the pre- and post-Australian Equivalents to International Financial Reporting Standards (AIFRS) periods. In the pre-AIFRS period, Australian firms enjoyed wide discretion in accounting for intangible assets. However, with the adoption of AIFRS in 2005, managerial discretion in accounting for the assets has become more restrictive. This allows the impacts of alternative accounting practices in these two periods to be investigated. The sample used in this study consists of 900 and 1,225 firm-years for the pre and post AIFRS period, respectively. Sample firms are classified into three life cycle stages; Growth, Mature and Decline, based on Anthony and Ramesh's (1992) classification method. Four regression models based on the Ohlson (1995) valuation model are used in the tests of value relevance. The findings indicate that during the pre-AIFRS period, capitalised identifiable intangible assets are regarded by the Australian market as value relevant. The results also suggest that although there is a significant difference in value relevance between Decline and Mature firms, the same effect is not present between Growth and Mature firms. Further, the results indicate that identifiable intangible assets for Growth and Mature firms are value relevant but not for Decline firms. Although the findings provide support to previous studies on the use of accounting choice as a signalling mechanism, there is also evidence to suggest that it is not employed homogeneously across firms. A comparison between the pre- and post-AIFRS period suggests that the market attaches higher value relevance to identifiable intangible assets after the adoption of AIFRS. The findings also suggest that AIFRS implementation has led to an increase in the value relevance in all three firm life cycle stages and that there is no significant difference between these stages. Nonetheless, the impact of AIFRS implementation is more substantial for Decline firms with evidence of value relevance found only in the post-AIFRS period. This suggests that the concerns over a more restrictive accounting treatment for intangible assets following the adoption of AIFRS could lead to firms providing less value-relevant information might be overstated and unwarranted. The findings presented in this study should be useful to both researchers and accounting standard setters in the ongoing debate on allowing managerial discretion with regards to accounting for intangible assets, particularly following the adoption of AIFRS.