The Impact of Non-Gaap Disclosure on the Purchase Price Allocation to Definite-Lived Intangible Assets in Mergers and Acquisitions
53 Pages Posted: 2 Dec 2020
Date Written: August 2020
We test whether firms that exclude the effects of amortization from their non-GAAP earnings allocate more of an acquisition’s purchase price to definite-lived intangible assets and less to tangible assets and goodwill. This strategy yields two benefits. First, it increases non-GAAP earnings by shifting the depreciation of tangible assets, which non-GAAP earnings includes, to amortization, which non-GAAP earnings excludes. Second, it decreases the likelihood of future goodwill impairments by reducing goodwill, but does not decrease non-GAAP earnings. Consistent with expectations, non-GAAP firms that exclude amortization allocate more of the purchase price to definite-lived intangible assets, primarily by shifting away from tangible assets. However, managers are more likely to shift allocations away from goodwill when impairments are likely to be costlier. These results indicate that non-GAAP reporting can influence management’s GAAP accounting choices, which runs counter to the traditional view that non-GAAP reporting is a response to features of GAAP earnings.
Keywords: non-GAAP disclosure, pro-forma earnings, mergers and acquisition, purchase price allocation
JEL Classification: M40, M41, M45
Suggested Citation: Suggested Citation