• business combination
• goodwill
• IFRS 3

In the last three decades, Merger and Acquisition (M&A hereafter) activity showed a significant increase around the world as regards the number of deals as well as their amounts, peaking in 2000 and 2007. Nevertheless, business combinations decrease in the first 2000s and following the 2008 financial crisis, especially in the European context (KPMG, 2010), confirming the strong linkage between investment decision and optimism in financial markets (Gugler et al., 2012).
So far, academic literature has widely investigated M&A activity showing that these corporate events could be analysed from multiple economic subfields (Liao, 2014).
In such a scenario, also accounting issues play a primary role in influencing M&A decisions, affecting information conveyed to investors and other stakeholders as well as future performances of the companies involved in M&A transactions. Particularly, establishing the use of different accounting methods standard setters can affect the whole process of selection, valuation, negotiation and implementation of transactions (Baker et al., 2010).
As regards, in the European context the IAS/IFRS adoption considerably changed rules on accounting for business combinations as well as goodwill eventually arising from the acquisition. Additionally, IASB has just undertaken a Post-implementation Review (PIR) in order to consider and discuss unexpected costs as well as implementation problems arising from IFRS 3 adoption. Evidence collected from investors, preparers, auditors, and regulators confirms that they generally appreciate the uniformity between IASB and FASB in accounting for business combinations. On the other hand, they present mixed point of views especially as regards opportunity for a return to an amortization-based model of accounting for goodwill, since many of them consider impairment test costly, time-consuming and complex. Additionally, they express concerns on actual implementation of fair value measurements, especially for intangible assets without an active market, due to uncertainty they involve.
In such a perspective, also academic literature has widely investigated accounting treatment of business combinations and goodwill (Boennen and Glaum, 2014).
Accounting literature mainly focused on determinants (Crawford, 1987; Aboody et al, 2000; Ayers et al., 2002) and effects (Ayers et al., 2000; Davis, 1990; Martinez-Jerez, 2008) of the choice between purchase and pooling-of-interests methods as well as studies on earnings management practices related to business combinations (Erickson and Wang, 1999; Louis, 2004), and disclosure (Shalev, 2009; Glaum et al., 2013).
Consistently with results of previous studies, decisions on accounting for business combinations are strongly associated with accounting treatment of goodwill. Therefore, since in many cases goodwill is the largest item on companies’ balance sheet (Boennen and Glaum, 2014), representing 59% of the purchase price on average (Shalev et al., 2013), and in the light of PIR results as well as the current academic debate on accounting for goodwill, this dissertation aims at providing empirical evidence on the determination of goodwill arising from business combinations accounted for under requirements of IFRS 3 Revised. Actually, the extant goodwill accounting literature mainly explores causes and effects of impairments (Li et al., 2011), the value relevance of goodwill (Jennings et al., 1996; Henning et al., 2000) as well as managerial incentives involved in impairment test (Beatty and Weber, 2006; Ramanna and Watts, 2012), whereas it does not provide much insight into the initial measurement of purchased goodwill in business combinations (Bassemir and Gebhardt, 2010; Bugeja and Loyeung, 2014).
Based on these arguments, I develop three empirical studies that shed light on: (i) the managerial discretion in the allocation of goodwill resulting in the recognition of abnormal goodwill amount; (ii) determinants of provisional goodwill determination; and (iii) influence of full-goodwill option on value relevance of goodwill.
Particularly, the first study examines whether market pressure, measured by poorly received business combination announcements, influences the managerial discretion in purchase price allocation, especially as regards the recognition of abnormal goodwill.
Furthermore, the second study aims at investigating if the decision to account for goodwill on a provisional basis is affected by signalling purpose, rather than potential difficulties in estimating the fair value of acquired assets and liabilities. Finally, the third study examines the potential influence of the full goodwill option on the value relevance of goodwill.
In pursuit of these objectives, I analyse a sample of acquisitions concluded by listed companies over a four years period of 2010-2013 in the European context.
Main findings suggest the presence of a linkage between goodwill amount and trend in stock prices of the acquirer, rather than specific features of the target company or issues related to the concluded transaction. The findings of these studies and their implications have both theoretical significance and practical importance. Particularly, they could improve standard setter’s activity, especially in order to revise accounting treatment of business combinations. Additionally, they could fuel the current debate on accounting for goodwill, highlighting the relevance of the initial determination of goodwill amount.