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

See all articles by Jason Ashby

Jason Ashby

University of Louisiana Monroe

James Chyz

University of Tennessee, Knoxville - Department of Accounting and Business Law

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Date Written: August 2020

Abstract

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

Ashby, Jason and Chyz, James and Myers, Linda A. and Whipple, Benjamin C., The Impact of Non-Gaap Disclosure on the Purchase Price Allocation to Definite-Lived Intangible Assets in Mergers and Acquisitions (August 2020). Available at SSRN: https://ssrn.com/abstract=3714234 or http://dx.doi.org/10.2139/ssrn.3714234

Jason Ashby

University of Louisiana Monroe ( email )

700 University Ave
Monroe, LA 71209
United States
3183421119 (Phone)

James Chyz

University of Tennessee, Knoxville - Department of Accounting and Business Law ( email )

Knoxville, TN
United States
865-974-1701 (Phone)

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
107
Abstract Views
585
rank
311,154
PlumX Metrics