As

School of Business
Master’s Thesis
Accounting

Elina Hämäläinen

Accounting treatment for intangible assets acquired in a business
combination under IFRS

Supervisor/Examiner: Satu Pätäri
Second Examiner: Pasi Syrjä
ABSTRACT

Author: Elina Hämäläinen
Title: Accounting treatment for intangible assets acquired in a
business combination under IFRS
Faculty: LUT, School of Business and Management
Major: Accounting
Year: 2015
Master’s Thesis: Lappeenranta University of Technology
127 pages, 4 figures and 25 tables
Examiners: Professor Satu Pätäri
Professor Pasi Syrjä
Keywords: Intangible assets, business combinations, IFRS, goodwill,
accounting, media companies

The role of intangible assets and the amount of business combinations have
increased significantly during the last decades which has caused the need to reform
and harmonise the accounting treatment for acquired intangible assets. The aim of
this study is to find out how the new accounting standard for business combinations,
IFRS 3, has affected the accounting treatment for identifiable intangible assets and
goodwill in the examined media companies between 2005 and 2014. The most
significant reforms introduced by IFRS 3 have been goodwill impairment test and
the fair value accounting for acquired intangibles. This study is conducted by using
a descriptive analysis and the empirical data consists of financial statement
information of listed Finnish and international media companies. The main
objectives of IFRS 3 have been to reduce the amount of acquisition cost allocated
to goodwill and allow companies to recognise new intangible assets separately from
goodwill. The results of this study show that the amount of the acquisition cost
allocated to goodwill has decreased during the examined period and due to the fair
value accounting, business acquisitions have made new intangible assets visible
that otherwise would have not met the recognition criteria under IAS 38. The
application of IFRS has revealed a big amount of invisible assets in the balance
sheets but at the same time this has reduced the comparability between companies.
TIIVISTELMÄ

Tekijä: Elina Hämäläinen
Tutkielman nimi: Yritysten yhteenliittymistä nousevien aineettomien
hyödykkeiden tilinpäätöskäsittely IFRS –standardien
mukaisesti
Tiedekunta: LUT, Kauppakorkeakoulu
Pääaine: Laskentatoimi
Vuosi: 2015
Pro gradu –tutkielma: Lappeenrannan teknillinen yliopisto
127 sivua, 4 kuvaa ja 25 taulukkoa
Tarkastajat: Professori Satu Pätäri
Professori Pasi Syrjä
Hakusanat: Aineettomat hyödykkeet, yritysten yhteenliittymät, IFRS,
liikearvo, kirjanpito, mediayhtiöt

Aineettomien hyödykkeiden merkitys yritysostoissa on kasvanut merkittävästi
samalla, kun pitkään jatkunut keskustelu tilinpäätösten luotettavuuden
heikkenemisestä on nostanut esille sen, että yritysten tilinpäätökset eivät riittävissä
määrin heijasta aineettomien hyödykkeiden arvoa. Tämän tutkielman tavoitteena on
selvittää, kuinka tarkasteltavat mediayhtiöt ovat soveltaneet yritysostoihin liittyvää
tilinpäätösstandardia (IFRS 3), jonka päätavoitteena on ollut erityisesti
liikearvon käsitteen selkeyttäminen sekä liikearvolle allokoitavan hankintahinnan
määrän vähentäminen tunnistamalla aineettomia hyödykkeitä erillään liikearvosta.
Samalla standardin tarkoituksena on ollut tuoda uusia aineettomia hyödykkeitä
näkyväksi yritysostojen yhteydessä. Käyvän arvon soveltaminen yritysostoissa
nouseville aineettomille hyödykkeille on ollut merkittävä uudistus, ja tuonut
tavoitteiden mukaisesti näkyväksi uusia aineettomia hyödykkeitä, jotka muutoin
olisivat olleet aktivointikelvottomia IAS 38:n mukaisesti. Tämän tutkielman tulokset
osoittavat, että liikearvolle allokoitavan hankintahinnan määrä on vähentynyt
tarkasteltavissa yrityksissä, mutta samalla ne nostavat esille sen, että yritysten
taseet sisältävät näkymätöntä aineetonta omaisuutta, jotka eivät täytä IAS 38:n
aktivointiedellytyksiä, ja näin ollen tämä heikentää vertailtavuutta yritysten välillä.
ACKNOWLEDGEMENTS

The first thing that came into my mind when I started to write these
acknowledgements was: Am I really done? I moved to Lappeenranta about five
years ago and at that time I did not know what to expect. These past five years have
been amazing and I have met so many new and wonderful people and got
unforgettable memories. During these years in Lappeenranta, I have also found my
own fields of interests. Writing this thesis has been a long process including both
ups and down but now it has finally come to an end.
First, I want to say thank you to my parents, who have been the most important
support for me during my whole life and helped me both financially and mentally and
encouraged me to do what I want. I also want to say thank you to my lovely friends,
Rosa and Laura, because I would not be in this point without your support and our
prolonged lunch conversations.
I would like to thank my examiners, Satu and Pasi, for the comments and guidance
and help to improve the content of this study. Last, I want to say a special thank you
to Juha Nuutinen at Alma Media for all the comments, new development ideas,
expertise and the possibility to co-operate with you.
I also want to thank everyone who has stood by me during this process and
supported me. I would not be here without all this support. However, now it is time
to say goodbye to Lappeenranta, leave a student life behind and move on.
Elina Hämäläinen
Helsinki, 17.10.2015

Table of Contents
1 Introduction .................................................................................................... 1
1.1 Background and motivation ...................................................................... 1
1.2 Literature review ....................................................................................... 2
1.3 Research questions, objectives and delimitations .................................... 6
1.4 Research methodology and data .............................................................. 8
1.5 Structure of the study ................................................................................ 9
2 Accounting for intangible assets ................................................................ 10

2.1 Background ............................................................................................. 10
2.2 The value relevance of financial statements and intangible assets ........ 11
2.3 International Financial Reporting Standards ........................................... 16
2.3.1 Intangible assets ................................................................................. 17
2.3.2 Recognition criteria of intangible assets .............................................. 20
2.3.3 Initial recognition, measurement subsequent to acquisition and
amortisation .................................................................................................... 25
2.3.4 Accounting for business combinations ................................................ 26
2.4 Accounting for intangible assets acquired in a business combination
under IFRS 3 ..................................................................................................... 29
2.4.1 Accounting treatment for goodwill under IFRS 3 ................................. 30
2.4.2 Fair value accounting of acquired intangible assets ............................ 35
2.4.3 Disclosures related to intangible assets and goodwill ......................... 39
2.5 Theoretical evidence for using IFRS accounting for business
combinations ...................................................................................................... 41
2.5.1 Accounting conservatism .................................................................... 42
2.5.2 The effects of the adoption of IFRS on the value-relevance of intangible
assets 43
2.5.3 The value relevance of goodwill impairments and fair values ............. 47
3 Accounting treatment for acquired intangible assets in the media

companies ............................................................................................................ 52
3.1 Research data and description of research process ............................... 52
3.2 Alma Media ............................................................................................. 55
3.3 Sanoma ................................................................................................... 63
3.4 Schibsted Media Group .......................................................................... 72
3.5 Modern Times Group .............................................................................. 78
3.6 Axel Springer Group ............................................................................... 85
3.7 The main findings and discussion ........................................................... 92
4 Summary and conclusions ....................................................................... 100

4.1 Answers to the research questions ....................................................... 100
4.2 Contribution of the study ....................................................................... 103
4.3 Further research and limitations ........................................................... 107
References ......................................................................................................... 109

LIST OF FIGURES

Figure 1. Intangible and tangible business investments in 2009
Figure 2. Intangible asset recognition criteria under IAS 38
Figure 3. Alma Media’s goodwill and identifiable intangible assets amounts
(million EUR) in the balance sheet between 2005 and 2014
Figure 4. Axel Springer’s shares of the acquisition costs allocated to goodwill
between 2006 and 2014

LIST OF TABLES

Table 1. History of IFRS 3
Table 2. The basic information about the examined companies in 2014
Table 3. Alma Media’s balance sheet information
Table 4. Alma Media’s income statement information
Table 5. Impact of business acquisitions on Alma Media’s assets and
liabilities
Table 6. Carrying amounts and fair values of acquired assets
Table 7. Sanoma’s balance sheet information
Table 8. Sanoma’s income statement information
Table 9. Impact of business acquisitions on Sanoma’s assets and liabilities
Table 10. Carrying amounts and fair values of Nowa Era
Table 11. Carrying amounts and fair values of Independent Media
Table 12. Schibsted’s balance sheet information
Table 13. Schibsted’s income statement information
Table 14. Impact of business acquisitions on Schibsted’s assets and liabilities
Table 15. Specification of acquired intangible assets
Table 16. Modern Times Group’s balance sheet information
Table 17. Modern Times Group’s income statement information
Table 18. Impact of business acquisitions on Modern Times Group’s assets
and liabilities
Table 20. Axel Springer’s balance sheet information
Table 21. Axel Springer’s income statement information
Table 22. Impact of business acquisitions on Axel Springer’s assets and
liabilities
Table 24. Summary of the examined companies’ balance sheet information in
2005-2014
Table 25. Summary of the impact of business combinations on the examined
companies’ assets and liabilities in 2005-2014, averages

LIST OF ABBREVIATIONS

FASB Financial Accounting Standards Board

GAAP Generally Accepted Accounting Principles

IAS International Accounting Standards

IASB International Accounting Standards Board

IFRIC FRS Interpretation Committee

IFRS International Financial Reporting Standards

SFAS Statement of Financial Accounting Standards

US GAAP United States Generally Accepted Accounting Principles

1
1 Introduction

1.1 Background and motivation

An underlying trend in the nature of economic activity has been one of the most
significant reasons for the growing importance of intangibles. Resources spent on
intangible assets have conventionally been expensed and treated as costs and not
as investments. This traditional accounting treatment for intangibles has reduced
the value relevance of financial statements as the importance of intangibles has
been continuously increasing and advocates of greater intangible asset reporting
often argue that financial statements do not reflect the value of intangible assets.
Over the last decades there have been needs for accounting reforms and a general
view is that the traditional historical cost approach is no longer useful as the
economy has shifted from industrial-based to knowledge-based where intangibles
play an important role. (Cañibano et al. 2000;; Hoegh-Krohn & Knivsflå 2000)

A study made by OECD (2012) reveals that investments in intangible capital have
grown and in many cases, they are even more important than tangible investments.
The figure 1. below shows that in many countries intangible investments are as
important as tangible and in the USA and UK the total business investments in
intangible capital have been even bigger than investments in tangible capital in
2009. As the importance of intangibles has grown there has also been an increased
focus on mergers and acquisitions that has caused the need for creating the
accounting for intangible assets acquired in a business combination. These
transactions can have significant benefits, e.g. increased stakeholder value and
market share and cost reductions, for the acquiring company but the related
accounting is complex.
2
Business Investments in Intangible and Tangible Capital,

2009 (% GDP)
20
18
16
14
12
10
8
6
4
2
0
Intangible Tangible

Figure 1. Intangible and tangible business investments in 2009 (OECD 2012)

There are several reasons for the complexity related to intangibles like that the
nature of intangible assets, which is less detectable because they are without
physical substance. In addition, all the intangibles are not usually recognised in the
acquiree’s pre-combination financial statements and fair value determination of
intangible assets often requires estimation techniques because of the lack of quoted
market prices. This topic is very relevant especially in the media sector due to the
digitalisation process and the changes in the customer preferences as they are
switching to digital channels and mobile services. Because of this, media companies
have been searching for growth though business acquisitions to keep up with the
speed of digitalisation and new technology.

1.2 Literature review

There are numerous studies and surveys examining intangible assets’ impacts on
the companies’ success and productivity (Kyläheiko et al. 2004; Lönnqvist 2007;
Saarnivaara 2007) and many academic studies, e.g. Chen et al. (2005), Huang and
Wang (2008) and Shakina and Molodchik (2014) agree that intangibles are the most
3
important strategic resources. The specific nature of intangible resources allows to

create a sustainable competitive advantage but, on the other hand, it also
complicates their practical usage as well as their theoretical investigation and
accounting treatment.
The importance of intangible assets has continuously been growing and researches
have been attempting to show that intangible investments do contribute a
company’s future performance. Therefore, they should be considered as assets but
researchers have still not found a consistent solution for for the accounting treatment
for intangible assets. (e.g. Cañibano et al. 2000, Choi et al. 2000, Egginton 1990,
Hoegh-Krohn & Knivsflå 2000, Skinner 2008;; Zéghal & Maaloul 2011) Accounting
for intangible assets, goodwill and other identifiable intangible assets, has been one
of the most complex issues in the harmonisation of accounting standards and
different opinions are regarding whether some or all the intangible assets should be
capitalised or not and if so, whether they should be amortised or subjected to annual
impairment test. (Sahut et al. 2011;; Dahmash et al. 2009;; Hoegh-Krohn & Knivsflå
2000)

Advocates of greater intangible asset reporting frequently criticise that the published
financial statements of companies do not reflect the value of intangible assets and
thus provide misleading information to the users of the financial statements (Lev &
Zarowin 1999;; Aboody & Lev 1998;; Godfrey & Koh, 2001). Older studies by
Rubinstein (1973) and Epstein and Turnbull (1980) have already noticed in their
studies that the value of an asset is inversely related to the uncertainty of expected
future benefits from an asset and this relationship is totally ignored in many balance
sheet and income statement measures. When it comes to intangible assets, this is
relevant because of the great uncertainty associated with the amount and timing of
future economic benefits of intangibles.

The value-relevance and reliability of financial statements and intangible assets
have been an extensively discussed topic among academic researchers during the
last three decades. A growing number of older empirical studies have documented
4
that the value-relevance of financial statements has been decreasing over the past
decades as accounting numbers, especially reported earnings, are less able to
explain variations in stock prices than before. (e.g. Hayn, 1995;; Lev & Zarowin 1999;;
Beaver et al. 1987;; Easton & Harris, 1990) However, despite the fact that earnings
have become less value-relevant there is also clear evidence that book values and
balance sheet have become more value-relevant as the focus is moving from
income statement towards balance sheet (Francis & Schipper 1999, Lev and
Zarowin 1999, Collins et al. 1997).

Much of the academic research has focused on the topics related to accounting for
goodwill, which is also the largest intangible asset for many firms (Wiese 2005;;
Seetharaman et al. 2004;; Henning et al. 2000;; Johnson & Petrone 1998;; Jennings
et al. 1996;; Colley & Volkan 1988;; Wines et al. 2007). For example, Jennings et al.
(1996) has empirically investigated the relationship between market equity values
and purchased goodwill. Their results show that the market values purchased
goodwill as an asset. Older studies by Amir et al. (1993), Chauvin and Hirschey
(1994) and McCarthy and Schneider (1995) reported a significant positive
relationship between goodwill and the market value of a firm. Researchers also
disagree about whether goodwill is an asset or not (Johnson & Petrone 1998) and
several attempts have been made to define goodwill but it still seems to be unclear
(Giuliani & Brännström 2011;; Bloom 2009;; Colley & Volkan 1988;; Henning et al.
2000).

The academic researchers have also been keen on to investigate differences
between IFRS and US GAAP (Adams et al. 1999;; Bhimani 2008;; Harris & Muller
1999) The accounting treatment for business combinations is quite similar both
under IFRS and US GAAP. The adoption of International Financial Reporting
Standards (IFRS) has had major impacts on the recognition and measurement
practices for goodwill and other identifiable intangible assets. IFRS 3 Business
Combinations have changed the accounting for goodwill as impairment tests are
carried out instead of systematic amortisation and fair-value based accounting
numbers have been replacing traditional historical cost approach book values. In
addition to IFRS 3, IAS 38 which outlines the accounting requirements for intangible
5
assets and IAS 36 which ensures that assets are not carried at more than their
recoverable amounts. IAS 36 also regulates the impairment of assets. (Hamberg et
al. 263;; European Commission 2011;; 2010)

IFRS 3 has originally issued in 2004 by the International Accounting Standard Board
(later on the IASB). The standard outlines the accounting when an acquirer obtains
a control of a business. Recognition and fair value measurement of all the acquiree’s
identifiable intangible assets and liabilities at the acquisition date are among the
most relevant elements of the acquisition method under IFRS 3. The development
started in the U.S. when the Financial Accounting Standard Board, later on the
FASB, issued Statement of Financial Accounting Standards (SFAS) 141 (Business
Combinations) and 142 (Goodwill and Other Intangible Assets) in 2001. The IASB
also wanted to harmonise accounting standards in Europe, and since 2005 IFRS
has been the official accounting principles for all the listed companies in the
European Union. (Busacca and Maccarrone 2007, 307;; Hamberg et al. 263-264)

Many studies examining goodwill amortisations under US GAAP and other local
accounting standards in Europe and Australia have found that they are not value
relevant and they do not convey private information about future cash flows like
impairment test does (e.g. Egginton 1990;; Jennings et al. 2001, Churyk & Chewning
2003;; Chen et al. 2004;; Chalmers et al. 2011;; Chalmers et al. 2012). The
introductions of IFRS and goodwill impairment regime have also been widely
examined topic in recent studies (e.g. Oliveira et al. 2010;; Daske et al. 2008;;
Chalmers et al. 2012;; Carlin & Finch 2010;; Comiskey & Mulford 2010;; Wines et al.
2007;; Gjerde et al. 2008). Many studies (e.g. Oliveira et al. 2010;; Daske et al. 2008;;
Chalmers et al. 2012) find that markets have reacted positively to the transition of
IFRS. One of the biggest changes of IFRS adoption is the annual impairment test
for goodwill introduced by IFRS 3 issued in 2004. For example, Chalmers et al.
(2012) find that the accounting information under IFRS provides more useful
information especially about reported goodwill in Australia because IFRS 3 requires
an impairment test for goodwill.

6
1.3 Research questions, objectives and delimitations

The global interest in mergers and acquisitions has been growing due to the several
significant benefits, e.g. increased market shares and cost reductions, related to
them. The same trend can be seen in the media sector while companies have
actively been involved in business acquisitions as traditional print and broadcast
media companies have been struggling to compete with new online and mobile
media companies. Due to the recent digital transformation, which has already been
going on several years, traditional media companies has been trying to remain
competitive and keep up with the latest technology by acquiring other companies.
In this study, intangible assets are the key interest because in the media sector,
they form a major part of the assets in the balance sheet due to the nature of the
industry.

As mentioned above, the topic of this study is very actual and relevant and this is
why the objective of this study is to investigate how IFRS 3 has affected on the
accounting treatment for acquired intangible assets. The aim is to find out how the
examined companies have applied IFRS 3 in terms of acquired identifiable
intangible assets and goodwill comparing to the requirements set by IFRS 3 and
other examined companies.

The main research question of this study is:

• How the adoption of IFRS 3 has affected the accounting treatment for
identifiable intangible assets and goodwill acquired in a business
combination in the examined companies in 2005-2014?

The main research question examines how the examined companies have applied
IFRS 3 and how it has affected the accounting treatment for acquired identifiable
intangible assets and goodwill. This study investigates, whether there can be found
significant changes in the business combination accounting after 2005 when IFRS
3 was introduced. In addition, this study examines, whether it can be found
differences in applying IFRS 3 between the examined companies during the
7
examined time period. The subjects of this study are Finnish and international media
companies which includes both small and big companies.

Sub questions related to the main research question are:
1. How has the value-relevance of financial statements and intangible assets
changed along with the introduction of IFRS 3?
2. What are the requirements set by IFRS 3 to the accounting treatment for
goodwill and other intangible assets?
3. What are the advantages and challenges of IFRS 3 related to the accounting
treatment for goodwill and other intangible assets?

The first sub question concentrates on the value relevance of financial statements
and intangible assets and whether the adoption of IFRS 3 has impacted positively
on the value relevance of financial statements and intangible assets. The value
relevance of goodwill impairments is also investigated as impairment test for
goodwill introduced by IFRS 3 is one of the most significant reforms of IFRS
accounting. The second sub question examines the requirements set by IFRS
related to the accounting treatment for business combinations and goodwill and
other intangible assets arising on the acquisitions. The third sub question examines
both advantages and challenges of IFRS 3 related to the accounting treatment for
goodwill and other identifiable intangibles.

The topic of this study is examined from the perspective of accounting professional
and IFRS 3 standard is examined only insofar as it relates to the accounting
treatment for goodwill and other intangible assets. In the empirical part, the topic
covers only media sector as media companies in Finland and worldwide have
actively been involved in business combinations and intangible assets play a major
role in the media sector and cover a significant share of assets acquired in business
combinations made in the media sector. The examined companies are examined at
group level as the key interest is IFRS accounting so the data consists of
consolidated financial statements, which are prepared in accordance with IFRS.
Therefore, the relevant IFRS standards form a theoretical framework of this study.
8
Financial statements of parent companies are prepared according to local

accounting standards so they are not included in the observation.

1.4 Research methodology and data

The literature in the theory chapters consists of topics related to International
Financial Reporting Standards (IFRS) and International Accounting Standards (IAS)
and academic studies and journals and other relevant literature related to the topic.
The aim of the theory chapter is to give a deep understanding of the nature of
intangible assets, accounting treatment related to intangible assets and business
combinations and the historical development of intangible asset accounting. It is
also examined how other studies have investigated these topics.

This study is conducted by using a qualitative research methodology. The idea of
using qualitative research methodology is to get an in-depth understanding about
the research subject. In the empirical part, the gathered quantitative and qualitative
data is examined in a descriptive level. The research data consists of annual reports
and consolidated financial statements and this study tries to answer the research
questions by analysing the collected data.

This study uses financial statements data from the time period of 2005-2014. The
data about business combinations and intangible assets is collected from the
consolidated annual reports. The examined time period was chosen based on that
IFRS 3 was applied first time in 2005, and to get the best result to make conclusions
as many fiscal years as possible is included in the investigation. Five companies
have been chosen of which two are Finnish listed companies and others are
international. The financial statements of all the examined companies from 2005-
2014 are included in this observation. All the selected companies are listed
companies and due to this they all apply IFRS and the reporting practices are similar
and comparable.

9
1.5 Structure of the study

This study consists of four main chapters. The first chapter is the introduction which
includes the background and motivation, literature review, research questions,
objectives and delimitations, research methodology as well as structure of the study.
The second chapter is the theory part. First, it takes a look at the value relevance of
financial statements in general and then the value relevance of intangible assets.
Second, IFRS are examined and how the accounting for intangible assets and
business combinations are treated under these standards. Last, theoretical
evidence is presented in favor of using IFRS accounting for acquired intangible
assets. The third chapter is the empirical part and analyses Finnish and international
media companies on how the IFRS has affected the accounting treatment for
acquired intangible assets between 2005 and 2014. The last main chapter includes
the summary and conclusions.

10
2 Accounting for intangible assets
2.1 Background

Accounting for goodwill and other intangible assets has been one of the biggest
problems of financial reporting and extensively discussed topic among researchers
(e.g. Canibano et al. 2000, Choi et al. 2000, Egginton 1990, Hoegh-Krohn & Knivsflå
2000, Skinner 2008;; Zéghal & Maaloul 2011). This problem is very relevant because
of the changes in the financial environment that has caused the continuously
growing importance of intangible assets. Fast changing technology and
communication media require more complex resources and tangible assets alone
do not guarantee the success and expenses related to intangible assets often create
future economic benefits. Traditionally, resources spent on intangible assets have
been treated as costs and expensed in the balance sheet instead of seeing them as
valuable investments and capitalising in the balance sheet. International mergers
and acquisitions and rapidly developed financial markets are one of the key reasons
why intangible asset regulation is extremely important (Ji & Lu 2014, 188).

According to Lev (2008, 210) there are two things that have to be done: capitalise
intangible investments and improve the standardised disclosures about intangibles.
There are three primary issues relating to accounting treatment for intangible
assets. First, should intangible assets be recognised (capitalised rather than
expensed) in the balance sheet and if they should, should internally generated
intangibles be treated differently from purchased intangible assets. Second, should
all the capitalised intangible assets be systematically amortised including those with
indefinite lives or should they rather be subjected to impairment test and on what
basis. Third, should companies be allowed to revalue (upwards) intangible assets
to better reflect their fair values and under what circumstances. (Sahut et al. 2011,
270)

11
Lev (2001, 16) states that there are two forces that have caused the shift towards
intangibles: an increase in global competition and changes in information
technology. Accounting academics have advocated recognising intangibles in
financial statements and provided much evidence in their studies to show that
intangibles are value relevant and they should be recognised in the balance sheet
(e.g. Aboody & Lev 1998;; Francis & Schipper, 1999;; Lev and Zarowin, 1999;; Hoegh-
Krohn & Knivsflå 2000;; Goodwin and Ahmed, 2006). According to Dahmash et al.
(2009) the recent shift from the profit and loss statement towards the balance sheet
increases the importance of appropriate recognition of intangible assets.

Skinner (2008) and Zéghal and Maaloul (2011) provide a good summary and a
critical evaluation of the arguments that have been advanced in favor of reforming
the current accounting and disclosure practices relating to intangible assets. Zéghal
and Maaloul (2011) state that because of the inadequate accounting treatment of
intangibles, more information about them should be disclosed. Skinner (2008) argue
that evidence provided to support accounting reforms related to intangible assets is
weak, especially in the case of expanding the existing asset recognition criteria to
include intangibles, which are currently excluded from the balance sheet. According
to him, accounting regulators can provide guidance but relying on private incentives
to encourage the disclosure related to the management and valuation of intangibles
is more important. Both of these studies highlight the importance of disclosures.
However, even though academic researchers do not agree how intangibles should
be treated everyone admits that the value relevance of financial statements have
been decreasing and one of the reasons is that the importance of intangible assets
have been growing continuously.

2.2 The value relevance of financial statements and intangible assets

The purpose of financial statements is to provide relevant information for users in
making economic decisions. Financial statement information has been criticized for
failing to reflect changes in the uncertainty of future economic benefits and costs
related to different assets and there has been an increasing concern about the
decreased value relevance and reliability of financial reporting. Some of the
12
concerns expressed about the current reporting model focus on the content of what
is reported;; it has been asserted that the current reporting model does not recognize
and measure economic assets that create shareholder value. One reason for this
might be that either because accounting standards and practices have not changed
as business has changed. The other possible reason can be that accounting
standards and practices have changed in ways, which does not give value-relevant
information. (Choi et al. 2000, 35;; Francis & Schipper, 1999, 323;; Hoegh-Krohn &
Knivsflå 2000, 254)

Intangible resources should be recognised in the balance sheet to maximize the
informational relevance of financial statements. Information is relevant if it can
confirm or change a decision maker’s expectations and the value-relevance of
financial statements can be defined as “… ability to confirm or change investors’
expectations of value”. Further, the value-relevance of financial statements can be
measured by the response in the market price or volume when accounting
information is revealed or by their ability to explain variations in the market price or
volume. In addition to these, value-relevance can also be measured by the total
return that could be earned from pre-disclosure knowledge of financial statement
information. (Hoegh-Krohn & Knivsflå 2000, 255)

Lev and Zarowin (1999) have found a significant increase in the market-to-book ratio
of US firms from a level of 0,81 to 1,69 between 1973 and 1992. Basically, this
means that almost 40 percent of the company’s market value of is not reflected in
the balance sheet. They argue that intangible assets are the reason in the decline
because investment in intangible assets has increased significantly over time, and
because the current accounting practice for intangibles creates a discrepancy
between the valuation implied in firms' earnings and their stock prices.

There are also assumed to be other reasons than immediate expensing of
intangibles, such as the increase in percentage of losses and one-time items
(Collins et al. 1997) or the increase in returns volatility (Francis & Schipper 1999) in
explaining declining earnings value relevance. Collins et al. (1997) conclude that
the shift in value-relevance from earnings to book value can be explained by the
13
increasing significance of one-time items and the increased frequency of negative
earnings but mention also intangible intensity to be one of the reasons. Amir & Lev
(1996) find that, on a stand-alone basis, financial information (earnings, book values
and cash flows) is mostly irrelevant for the valuation of cellural companies and non-
financial (e.g. market penetration) is highly value-relevant. This finding indicates that
the traditional focus on financial information and variables may lead to wrong
conclusions if there is a big amount of unreported intangibles.

The value-relevance of intangibles has been extensively examined over the last 20
years as intangible assets have been stated to be one major reason for the declined
value relevance of financial statements (e.g. Cañibano et al. 2000;; Dahmash et al.
2009;; Godfrey & Koh, 2001;; Wyatt 2008). Capitalising and amortising intangible
assets over their useful lives to better match costs with the future benefits is believed
to increase the informativeness of financial statements. However, intangibles are
difficult to record objectively and the value relevance and reliability of financial
statements may be even reduced if reporting entities are given more discretion to
recognise doubtful or even imaginary intangible assets. The pressure from financial
statement users to recognise more intangible resources as assets will increase as
the importance of intangibles increases. (Hoegh-Krohn & Knivsflå 2000)

Hoegh-Krohn and Knivsflå (2000) have examined accounting for intangible assets
in Scandinavia, the UK, and the USA. They conclude that in order to improve value
relevance of financial statements all types of intangible assets need to be capitalized
and subsequently amortised over their useful lives. They also state that some of the
previously expensed costs should be reversed and capitalised in the balance sheet,
which also will improve the value-relevance. Goodwin and Ahmed (2006) examine
the value-relevance of intangibles in Australia between 1975 and 1999 using
regression analysis. Even though they do not find clear evidence of the decreased
value relevance they, find that the value relevance of earnings in those firms, which
capitalise intangibles has increased more than in those firms that do not capitalise
intangibles. In general, the results indicate that the value relevance of earnings and
book values has increased for those companies, which capitalise intangibles.

14
Aboody and Lev (1998) examine software capitalization in 163 companies between
1987-1995 and conclude market values the capitalisation of intangible assets
compared with immediate expensing in the income statement. Choi et al. (2000)
examine the relationship between the reported value of intangible assets, the
associated amortisation expense and firm’s equity market values using a matched
pair portfolio and multiple regression analyses. Their results indicate that the
financial market positively values reported intangible assets and support the
criticism of financial statements’ failure to reflect changes in the levels of uncertainty
of different assets. According to them intangible assets should be reported in the
balance sheets but they should not be periodically amortised.

Due to the fact that goodwill is the most significant intangible asset, there are
number of studies examining the value relevance of reported goodwill in both US
and Australia and these studies indicate that capitalisation of goodwill does have
value to investors (Churyk 2005;; Godfrey & Koh 2001;; Henning et al. 2000). Godfrey
and Koh (2001) investigate the capitalisation of intangible assets in Australia using
regression analysis. Their results provide evidence that capitalisation of intangible
assets, as a whole, provides information which is relevant for firm valuation. They
also find that when examining intangible assets separately, both goodwill and
identifiable intangible assets seem to be value relevant. However, one interesting
fact is that investors attach more value to the reported goodwill than to other balance
sheets items including identifiable intangible assets. These findings indicate that
accounting treatment for goodwill has significant economic consequences.

Jennings et al. (1996) has empirically investigated the relationship between market
equity values and purchased goodwill in the US during the period of 1982-1988.
Their results show that the markets value purchased goodwill as an asset. In
addition, they also find little evidence of a systematic relationship between goodwill
amortisation and firms’ market values. Consistent with Jennings et al. Churyk (2005)
adds that goodwill is not typically overvalued when it is initially recorded and
supports that the systematic amortisation is not warranted and does not improve the
relevance of reported goodwill.

15
Regarding the capitalisation of acquired intangibles in general, Kimbrough (2007)
documents that investors find the values of recognised intangibles informative. He
finds that investors’ responses to the release of purchase price allocations are
increasing in both the percent of total assets that are recognised apart from goodwill
and in the percent of intangible assets that are recognised apart from goodwill. This
supports the FASB’s objective to maximize the amount of assets recognised apart
from goodwill. The evidence provided in this study supports the contention that the
disclosure of the decomposition of the purchase price yields information that is
relevant to investors in assessing a merger. As the IASB has followed the
development of US GAAP this may also mean that purchase price allocation under
IFRS provides useful information to investors and other stakeholders.

There is also another important concept which closely relates to the value relevance
and should be taken into account: the value reliability. According to Dahmash et al.
(2009) the value relevance is conditional on the value reliability. Ji & Lu (2014, 183)
agree and state that standard setters, like the IASB, are concerned about the
relevance of information about intangible assets because the reliability of such
information affects also the value-relevance. The value-relevance and value-
reliability of the accounting information about intangibles has to be improved but the
accounting regulators may be unable to improve both value relevancy and value
reliability simultaneously. Both of them are equally important because unreliable
information also reduces the value relevance of information. Wyatt (2008) also
argues that even though information about intangible assets is value relevant, these
assets may not be reliably measured.

Dahmash et al. (2009) have examined both value relevance and reliability (degree
of bias) of identifiable intangible assets and goodwill under Australian GAAP from
1994 to 2003 and find that information about intangible assets is value relevant but
also biased. Goodwill tends to be reported conservatively and identifiable intangible
assets aggressively. Their results indicate that the transition to IFRSs is about to
reduce the level of bias because these standards require goodwill to be tested for
impairment instead of systematic amortisation. Dahmash et al. also state that the
16
more prudent recognition requirements related to the recognition of identifiable

intangible assets reduce these biases. These recognition requirements are
examined in the next chapter.

2.3 International Financial Reporting Standards

Since 2005, European listed companies have been obliged to use International
Financial Reporting Standards (IFRS) as a regulation environment for consolidated
financial statements in an effort to achieve transparency and harmonisation of
financial reporting standards and to reinforce the integration of European capital
markets. More than 100 countries have adopted IFRS around the world despite it is
not mandatory for all of these countries and is rather based on recommendations.
(Haaramo 2012, 21) Carmona and Trombetta (2008) have examined the application
of IFRS and suggest that the inner flexibility enables the application of IFRS/IAS to
countries with diverse accounting traditions and varying institutional conditions.
Hence, a distinctive of IFRS standards is that they are principles-based instead of
rules-based and do not include specific guidance for every possible situation.
(Carmona & Trombetta 2008, 456)

IFRS standards are issued by the IASB. IFRS norms includes Framework, IFRS
and IFRIC. Framework includes the general fundamentals of preparation and
presentation of financial statements, IFRS includes financial statement standards
and IFRIC, IFRS Interpretation Committee, includes interpretation guidelines of
these standards. Accrual basis and going concern are the fundamental assumptions
of IFRS. Qualitative requirements of financial reporting can be divided into
fundamental characteristics and enhancing characteristics. Fundamental
characteristics include relevance and faithful representation and enhancing
characteristics include comparability, verifiability, timeliness and understandability.
(Haaramo 2012, 21, 32;; Troberg 2007, 26) From the perspective of acquired
intangible assets, the most relevant standards are IFRS 3, IAS 38 and IAS 36 that
are examined more detailed in the upcoming chapters.

17
2.3.1 Intangible assets

According to IFRS an intangible asset is “an identifiable non-monetary asset without
physical substance”. An asset, in turn, can be defined as a resource that is
controlled by the entity as a result of past events (for example, purchase or self-
creation) and from which future economic benefits (inflows of cash or other assets)
are expected. Accounting for intangible assets is regulated under IAS 38 and this
standard identifies three critical attributes of an intangible asset: identifiability,
control (power to obtain benefits from the asset) and future economic benefits, which
can be, for example, revenues or future cost reductions. (European Commission
2010, 3-5)

One common classification of intangibles mainly developed by accounting standard
setters divides them into two categories: internally generated intangibles and
externally acquired intangibles. This is also the classification IFRS uses. Both
externally and internally generated Intangible assets consist of identifiable intangible
assets and unidentified intangible assets, which cannot be identified separately and
form goodwill. Intangibles other than goodwill are usually called identifiable
intangible assets. Externally acquired intangible assets are purchased via
transactions with external parties and at arm’s-length prices. They can be
purchased individually or as a part of a business combination. A common externally
acquired intangible asset is purchased goodwill arising on a business combination
and it represents future economic benefits arising from synergy between identifiable
assets or from intangible assets that do not meet the definition of an identifiable
intangible asset. (Hoegh-Krohn & Knivsflå 2000, 245) Due to the special nature and
the importance of goodwill regarding this study, it is examined more closely.

Goodwill is one of the most complex and controversial intangible assets. The
simplest definition of goodwill is to consider it as an acquisition premium, which
means that goodwill is the cost above the fair value of firm once all the assets of the
firm have been stated at fair value. Much of the research has focused on issues
related to accounting for goodwill because it is also the largest intangible asset for
most companies. Despite the theoretical definition, goodwill is not clear from the
18
empirical perspective because it consists of many different elements and

components. Hence, it is important to investigate goodwill from an empirical
perspective because goodwill is also an empirical issue. (Choi et al. 2000, 36-37;;
Giuliani & Brännström 2011, 162;; Lhaopadchan 2010, 123)

Goodwill is generally considered difficult to interpret, because it consists of many
different components and accounting for goodwill has been constituting big
challenges to accounting standard setters (Henning et al. 2000;; Powell 2003).
According to the IASB goodwill is any excess of the costs of the acquisition over the
acquirer’s interests in the fair value of the identifiable assets and liabilities. Johnson
and Petrone (1998, 294) find two main perspectives of goodwill that can be
observed: a top-down perspective and a bottom-up perspective. From the top-down
perspective, goodwill is considered as a residuum of a larger asset after a breaking-
down process of this larger asset into goodwill and other identifiable intangibles.
From the bottom-up perspective goodwill is viewed in terms of its components which
means that goodwill is seen as a sum of unrecognized intangible assets which are
potential for identification or a sort of “purchase premium”. According to Giuliani and
Brännström (2011, 164) the concept of goodwill under IFRS does not reflect the
image of goodwill and one reason for this may be that the theoretical definition of
goodwill combines the top-down perspective with the bottom-up perspective.

It has also been under the discussion whether goodwill is an asset or not. For
example, Johnson and Petrone (1998) argue that from a top-down perspective
goodwill is an asset because it is viewed as a part of larger asset but from the
bottom-up perspective it is not as clear whether goodwill is considered as an asset
or not. Purchased goodwill is regulated under IFRS 3 and it treats goodwill as an
asset with indefinite useful life and defines goodwill as “An asset representing the
future economic benefits arising from other assets acquired in a business
combination that are not individually identified and separately recognised.”
(European Commission 2011, 13) The definition of goodwill is an academic problem
but from a practical point of view goodwill has also qualitative impacts on financial
statements related to how to e.g. value or impair goodwill (Giuliani and Brännström
2011, 162).
19

It is good to notice that recognising intangibles as an asset depends on the
accounting regulations. Under the definition of an asset made by the IASB some
intangibles do not meet the recognition criteria introduced by IAS 38, which is
examined more detailed in the next part, so the existence of goodwill depends on
that which intangibles can be recognised separately and which should be accounted
into goodwill. For example, human capital is a recurrent item in goodwill as it cannot
be recognised separately in the balance sheet due to the lack of control over the
expected future economic benefits from skilled workforce, so in the case of a
business combination it is accounted into goodwill (Eckstein 2004, 154). The
possibility to include different intangibles with a wide variety in goodwill makes the
definition of goodwill complex but at the same time very relevant for precision and
understandability. (Giuliani and Brännström 2011, 163-164)

Previous studies (e.g. Johnson and Petrone 1998) focus on goodwill from the
theoretical point of view but the study of Giuliani and Brännström (2011) is taking a
more practical perspective. They concentrate on the description of goodwill arising
from business combinations in Swedish and Italy and identify three different classes
named “Identified goodwill”, “Not specified” and “Residuum”. They examine whether
it can be found any consistency in how companies define goodwill in practice in the
first year of mandatory application of IFRS 3. The class “identified goodwill” includes
the cases in which goodwill is defined in terms of intangibles and/or synergies. The
second class covers the cases in which no explanations are found. The third class
defines goodwill as a residuum or as a difference between the purchase price and
fair value of net assets acquired. The majority of the companies in this study have
described goodwill as a residuum and many companies also supplied a description
of goodwill required by IFRS 3. In addition, they find that companies adopting a top-
down perspective seems to not disclose goodwill. (Giuliani and Brännström 2011,
167-168)

In those cases, where the goodwill is disclosed Giuliani and Brännström (2011, 169
identify three interpretations: “Core goodwill”, “Intangibles” and “Core goodwill and
intangibles”. The first one includes all the interpretations of goodwill in terms of
20
synergies and benefits. The second class “Intangibles” refers to all the intangibles
the company cannot account separately. The third class is the combination of other
two classes and includes both synergies and intangibles. Giuliani and Brännström
(2011) find that “Core goodwill” is the largest category and “Intangibles” is the
smallest. However, they conclude that despite the stimulation of IFRS 3, the top-
down approach for goodwill is still predominant and goodwill continues to be seen
as a residuum.

2.3.2 Recognition criteria of intangible assets

Intangible resources have some characteristics that are relevant when evaluating
whether they should be recognised as assets or not: (1) they have few or no
alternative uses because many intangible assets are firm-specific and difficult to
utilize for others, (2) problems with or lack of separability because many intangibles
only have value together with tangible assets, (3) difficulties to determine whether
the asset which was originally recorded is being maintained or whether a new asset
is gradually substituting it and (4) greater uncertainty of whether their costs will bring
future economic benefits. (Hoegh-Krohn & Knivsflå 2000, 257)

Intangible asset recognition is an important topic because of the nature of
intangibles. They are not easy to recognise and verify and that is the reason why
they can be used to manage and manipulate accounting numbers and reported
earnings. Under IFRS all the intangible expenses should meet the certain criteria to
be recognised as assets. The objective of IAS 38 is to prescribe the accounting
treatment for intangible assets and according to this standard an intangible asset
needs to be recognised if, and only if, it meets the certain criteria. IAS 38 requires
an entity to recognise an intangible asset (purchased and self-created) if, and only
if “it is probable that he future economic benefits that are attributable to the asset
will flow to the entity and the cost of the asset can be measured reliably”. (Hoegh-
Krohn & Knivsflå 2000, 249) The recognition criteria are applied both to externally
acquired and internally generated intangible assets. IAS 38 is applied to intangible
assets acquired in a business combinations occurring on or after 31 March 2004 but
it is not applied to purchased goodwill, which is regulated only under IFRS 3.
21

According to IAS 38 an intangible asset should be recognised if it is identifiable. An
intangible asset is identifiable when it is separable (capable of being separated and
sold, transferred, licensed, rented or exchanged either individually or together with
a related contract or arises from contractual or other legal rights, regardless of
whether those rights are transferable or separable from the entity or from other rights
and obligations. (Haaramo 2012, 190-191) However, Intangible assets are difficult
to identify and separate from other assets (Violeta & Mariana 2011, 297). Consistent
with this Wyatt (2001, 84, 110) notes that the assessment of the existence and
identifiability of intangible assets may be really challenging and this is the reason
why not all the intangible assets and investments are not recognised in the
company’s balance sheet.

An entity has the control over the asset if the entity has to power to obtain future
benefits, the entity can restrict others to access to benefit from the profits. Usually,
the company obtains a control through legal rights, e.g. copyright. In addition to the
control and identifiability, to be able to recognised the asset in the balance sheet,
probable future economic benefits, such as revenues or reduced future costs, are
expected. According to IAS 38, these future economic benefits must be based on
reasonable and supportable assumptions about conditions that will exist over the
life of the asset.”. This definition of probable future benefits allows management to
use their discretion to determine probability, which has also been criticised due to
the possibility for accounting manipulation and opportunistic behavior. (Haaramo
2012, 192-194) Figure 2. presents the recognition criteria under IAS 38.

22
Recognition
criteria
Future
Identifiability economic Control
benefits
The cost of the The power to

Arises from asset can be Probability obtain benefits
contractual or measured reliably from the asset
other legal rights
The power to

Separable restrict others

Figure 2. Intangible asset recognition criteria under IAS 38 (According to Haaramo
2012, 190-191)

Wyatt (2005, 999-1000) argue that limiting management discretion to record
intangible assets reduce rather than improve the quality of balance sheet and
investor’s information. Matolcsy and Wyatt (2006, 478) state that too prudent
recognition criteria may deteriorate the usefulness and quality of financial statement
information to analysts comparing to the situation where the management can
decide which intangible expenditures should be capitalised. According to Egginton
(1990, 183) the problem of recognition is the difficulty to define probable future
economic benefit. He also questions that the expected future economic benefits are
the core of the recognition criteria because there can also be more uncertainty over
the future benefits of tangible assets, such as oil and gas reserves.

Under IAS 38, if an intangible expenditure does not meet both the recognition criteria
and the definition of an intangible asset, this item has to be recognised as an
expense when it is incurred. The standard also prohibits an expenditure originally
charged as a cost to be reinstated as an intangible asset at a later date. Egginton
(1990) criticizes conventional accounts for preferring intangibles acquired by
purchase to be recognised as intangible assets more easily than those from
23
internally developed intangibles. Further, Su and Wells (2014) state that there is no
empirical evidence supporting the current regulatory distinction between acquired
generated identifiable intangible assets. This also reduces the comparability
between companies with internally developed intangible assets and companies with
purchased intangible assets. IAS 38 includes additional recognition criteria for
internally generated intangibles but it does not allow some intangibles, like internally
generated goodwill and advertising and promotional cost, to be recognised but
expensed immediately when incurred. For example, internally generated brands or
customer lists cannot be recognised as assets, unless they are acquired as a part
of business combination.

Acquired intangible assets can be recognised in the balance sheet because there
is an exchange transaction with inferred cost and verifiable confirmation. Internally
generated intangible assets cannot usually be recognised due to the absence of
verifiable cost in the exchange transaction. However, according to Petkov (2011,
40) an illustrative business combination could be used to help with the valuation of
internally generated intangible assets and so make it possible to recognise also
internally generated intangibles in the balance sheet.

The recognition criterion regarding the probability is always satisfied for intangibles,
which are acquired separately or in a business combination. Under IAS 38, there is
also a presumption that the fair value (and therefore the cost) of an intangible asset
acquired in a business combination can be measured reliably. Thus, if an intangible
asset acquired in a business combination is separable, sufficient information exists
to measure reliably the fair value of an asset. An intangible expenditure must be
either capitalised or expensed. If an intangible expense results from a business
combination and cannot be reported as an intangible asset, it has to be incorporated
into goodwill at the date of the acquisition. IAS 38 also specifies that after the initial
recognition amortisable intangibles has to be amortised over their useful life in
accordance with IAS 36. The amortisation method should reflect the pattern of
consumption of future economic benefits. Under IAS 38 and IFRS 3 an acquirer
recognises at the acquisition date, separately from goodwill, an intangible asset of
24
the acquiree in spite of whether the asset has been recognised before the business
combination. (Haaramo 2012, 197-198, 200)

Intangible assets are not as easy to recognise and identify as tangible assets and
the value-relevance of financial statements may even reduce if doubtful or non-
existing assets are recorded. Hoegh-Krohn and Knivsflå (2000, 244) provide
evidence of using prudent recognition criteria and state that it is important to
consider whether there exists a positive relationship between value-relevance and
reliability of financial statement information and intangible asset recognition and the
trade-off between relevance and reliability of capitalising/expensing also needs to
be taken into account. Kanodia et al. (2004) also highlight the relevance-reliability
trade-off when measuring intangibles and due to that intangible assets should be
measured only when they have a high relative importance in constituting firm’s
capital stock and the measurement can be done with sufficiently high precision.
They also state that most of the intangibles are firm-specific and nontradable in the
markets. Contrary to Hoegh-Krohn and Knivsflå and Kanodia et al., Wyatt (2008)
has also examined both value relevance and reliability but concludes that more
information is better even if it may be uncertain because it is still a signal for
investors that the asset actually exists. According to her, giving management more
discretion to report about the company’s economic reality, accounting regulators
could better facilitate value relevant disclosures on intangibles.
Recognition criteria by IAS 38 is too prudent concerning certain intangible assets,
such as internally generated intangibles. In most of the cases, the lack of control is
the reason why the recognition criteria are not met. As already mentioned, human
capital is a recurrent item in goodwill. The problem regarding human capital is that
the company does not own its employees as they always have a possibility to fire
themselves. The case is also the same with the expertise of management and loyal
customer base. (Haaramo 2012, 194-195) Lev (2001) underlines that companies do
not own their employees nor the ideas of employees. He also reminds that when a
company invests in to train its employees, other companies will benefit from these
25
kind of investments if the trained employee switches the employer. The legal
protection of human capital seems to be really difficult and challenging (Tao et al.
2005, 51). Human capital is an invisible item in the balance sheet and can be seen
only as an expense in the income statement. However, in connection with the
business acquisitions, it becomes visible as it can be accounted into goodwill.
(Danthine & Jin, 2007, 158)

2.3.3 Initial recognition, measurement subsequent to acquisition and amortisation

If the recognition criteria set by IAS 38 is met an intangible expenditure can be
recognised as an asset in the balance sheet. Intangible assets are initially measured
at cost. Subsequently, they are measured at cost or using the revaluation model
and amortised on a systematic basis over their useful lives, unless the intangible
asset has an indefinite useful life, in which case it is not amortised but tested for
impairment and regulated under IAS 36. The cost model means that after the initial
recognition an intangible asset should be carried at cost less accumulated
amortisation and impairment losses. When using the revaluation model, intangible
assets can be carried at a revalued amount, which is based on fair values, less any
subsequent amortisation and impairment losses only if fair value can be determined
by reference to an active market. However, active markets may be difficult to find
for some intangible assets. (Haaramo 2012, 200;; Troberg 2007, 55)

Under the revaluation model, revaluation increases are recognised in other
comprehensive income and accumulated in the revaluation surplus within equity
except to the extent that it reverses a revaluation decrease previously recognised
in profit and loss. If the revalued intangible has a finite useful life, the revalued
amount is amortised. IFRS 3 requires intangible assets acquired in a business
combination to be measured at their fair values at the acquisition date in accordance
with IFRS 13. Fair value accounting for acquired intangible assets is examined more
closely in the chapter 2.3.2.

As already mentioned one classification is to divide intangible assets into acquired
and internally generated intangible assets. However, intangible assets can also be
26
divided based on their useful lives. Indefinite useful life means that there is no
foreseeable limit to the period over which the asset is expected to generate cash
inflows to the entity. If an asset has a finite useful life, an asset will have a limited
period to generate benefit to the entity. Intangible assets with finite useful lives
systematic basis over the determined useful life. The amortization method should
reflect the pattern of benefits and the amortization period should be reviewed at
least annually. Amortisation methods are straight line method, declining balance
method and sum-of-the-years’-digits method. An intangible asset with indefinite
useful life should not be amortised under IAS 38. Asset’s useful life should be also
reviewed each reporting period to determine whether events or circumstances
continue to support an indefinite useful life assessment. (Haaramo 2012, 201-204)

An intangible asset with an indefinite useful life should be assessed for impairment
in accordance with IAS 36. The objective of IAS 36 is to ensure that assets are not
carried at more than their recoverable amount. In addition to intangible assets with
indefinite useful lives, goodwill acquired in a business combination is also tested for
impairment at least annually or whenever there is an indication of impairment. Under
IAS 36, there is a list of external and internal indicators of impairment to help to
estimate whether the asset has been impaired or not. External indicators include
e.g. market value declines and negative changes in the markets of economy and
internal indicators are e.g. worse economic performance than expected. Accounting
for goodwill is examined more closely in the next chapters.

2.3.4 Accounting for business combinations

Accounting for business combinations is regulated under IFRS 3. IFRS 3 defines a
business combination as “A transaction or other event in which an acquirer obtains
control of one or more businesses.”. The objective of IFRS 3 is to improve relevance,
reliability and comparability of financial statement information about a business
combination and its effects. This standard is applied to all transactions or other
events that meet the definition of a business combination. To accomplish this, IFRS
establishes three main principles and requirements for the acquirer:

27
1. How the acquirer recognises and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquire?
2. How the acquirer recognises and measures goodwill acquired in the business
combination or a gain from a bargain purchase?
3. How the acquirer determines what information to disclose and enable users
of the financial statements to evaluate the nature of financial effects of the
business combination? (European Commission 2011, 1, 15)

Table 1. History of IFRS 3 (Deloitte 2015)
Pronouncement Issued Effective date
Original issue 2004 Business
combinations after 31
March 2004
Comprehensive revision on applying the Revised Annual periods
acquisition method 2008 beginning on or after 1
July 2009
Amendments resulting from May 2010 May 2010 Annual periods
Annual improvements to IFRSs beginning on or after 1
July 2010
Amendments resulting from Annual December Annual periods
improvements 2010-2012 Cycle 2013 beginning on or after 1
(accounting for contingent consideration) July 2014
Amendments resulting from Annual December Annual periods
Improvements 2011-2013 Cycle (scope 2013 beginning on or after 1
exception for joint ventures) July 2014

IFRS 3 establishes recognition principle and measurement principle in relation to
the recognition and measurement of items arising in a business combination. Under
the recognition principle, identifiable assets acquired, liabilities assumed and non-
controlling interests in the acquiree should be recognised separately from goodwill.
28
In turn, the measurement principle means that all assets acquired and liabilities
assumed in a business combination are measured at acquisition-date fair value.

IFRS 3 does not apply to the formation of joint venture or a combination of entities
or businesses under common control. In addition, it does not apply to the acquisition
of an asset or a group of assets that does not constitute a business, but in such
cases the acquirer shall identify and recognise individual identifiable assets
acquired (including those assets that meet the definition of and recognition criteria
for intangible assets according to IAS 38 Intangible Assets). The cost of the group
should be allocated to the individual identifiable assets and liabilities based on their
relative fair values at the date of purchase. Such transaction or event does not give
rise to goodwill. (European Commission 2011, 1)

The acquisition method under IFRS 3 requires assets acquired and liabilities
assumed to be measured at their fair values at the acquisition date. The application
of the acquisition method (called the purchase method in the 2004 version of IFRS
3) involves four steps: First, an acquirer has to be identified for all levels of business
activities. Second, the cost of acquisition should be determined, and in the third
step, the cost of acquisition has to be allocated at acquisition date to the individual
assets acquired and the liabilities and contingent liabilities assumed. In order to
complete this, all acquired assets and liabilities has to be identified and valued at
their respective acquisition-date fair values, including intangibles which are not
recognised in the acquiree’s pre-acquisition balance sheet. (European Commission
2011, 1-3)

IFRS 3 has been revised in 2008. In addition to the introduction of the acquisition
method, the new revised version made changes e.g. to the purchase consideration
to the non-controlling interests measurement. Under the revised IFRS 3 all
previously held equity interests should be measured at fair values. The revised IFRS
3 also gives a choice in the measurement of non-controlling interests and allows to
measure non-controlling interests either at fair value (or the full goodwill method) or
the non-controlling interests’ proportionate share of net assets of the acquiree. IFRS
3 includes also the disclosure requirements, which include special requirements for
29
goodwill and acquired intangible assets but the accounting treatment for acquired
intangible assets is examined more detailed in the next chapters. (European
Commission 2011, 28-29, 32)

2.4 Accounting for intangible assets acquired in a business combination under
IFRS 3

Accounting for business combinations has dramatically changed since 2000. The
development started in the U.S. when the FASB issued Statement of Financial
Accounting Standards (SFAS) 141 (Business Combinations) and 142 (Goodwill and
Other Intangible Assets) in 2001. The IASB also wanted to harmonise accounting
standards in Europe, and since 2005 IFRS has been the official accounting
principles for all the listed companies in the European Union. The method of
accounting for mergers and acquisitions represents one of the most relevant areas
of innovation in the current release of IFRS (Busacca and Maccarrone 2007, 307).

Intangible assets are the most difficult to value in the acquisition accounting and one
reason for this is a unique and non-separable nature of intangibles (Lhaopadchan
2010, 123). Regulating the accounting for intangibles has also been one of the most
complex areas faced by the accounting standard setters and this issue is very
relevant because of the increased growth in international mergers and acquisitions
and fast development of international financial markets. (Hoegh-Krohn & Knivsflå
2000;; Kanodia et al. 2004).

Achieving synergy is, in general, one of the most important theoretical arguments
behind business combinations (Walter & Barney 1990). Business combinations
often have a high economic significance to the acquirers and can have a substantial
effect on their operations. They are among the largest items in the firm’s investment
activities and the magnitude of business combinations makes the disclosure on
business combinations extremely important. The growing importance of intangibles
in the balance sheet and as a portion of the assets acquired further increases the
importance of disclosure for investors’ evaluation about the effects of business
combinations on acquirers. (Shalev 2009, 241)
30

IFRS 3 outlines the accounting when an acquirer obtains control of a business (e.g.
mergers and acquisitions). These business combinations are accounted for using
the acquisition method, which requires that assets acquired and liabilities assumed
must to be measured at their fair values at the acquisition date. Before IFRS 3
goodwill was measured as the difference between the purchase price and the book
value of the acquired firm’s equity, but since the adoption of IFRS 3 at the time of
the acquisition the management of the entity identifies specific intangible assets in
the acquired company and capitalises them separately. Depending on the nature of
the intangible asset, they can be held indefinitely or amortised over their useful life.
(Hamberg & Beisland 2014, 60)

The aim of IFRS 3 is to harmonise the accounting treatment and reporting of
intangible assets identified in a business combination and to increase the level of
information related to intangible assets as well as to make them more visible in the
context of business combinations. The standard can also be seen as a tool to reduce
information asymmetry related to the better match of the value of an intangible asset
to reflect its future earnings (Brännström and Giuliani 2009, 70) Under the IFRS
accounting, there are two great innovations affecting the accounting treatment for
intangible assets acquired in a business combination. The first innovation is the
possibility to value selected strategic resources at fair value, which takes into
account the ability of these resources to create value. According to IFRS the most
relevant area for fair value application is the valuation of assets acquired in a
business combination. The second innovation is the impairment test for goodwill.
The purpose of this test is to identify any impairment loss in an asset’s value. The
impairment test acts as “a value control system” and introduces the concept of
intangible assets with indefinite. (Busacca and Maccarrone 2007, 309)

2.4.1 Accounting treatment for goodwill under IFRS 3

The key question concerning the accounting for business combinations is how to
treat the difference between the purchase price and the value of the acquired entity
(Schipper 2003, 64). Before the introduction of IFRS 3, goodwill was largely
31
measured as the difference between the purchase price and the book value of the
acquired firm’s equity. This is no longer the case under IFRS 3 but instead, at the
time of the acquisition, the management identifies specific intangible assets in the
acquired entity (e.g. patents, licenses or trademarks) that are to be capitalised
separately. Depending on the nature of these intangibles, they can be held
indefinitely or amortised over a maximum useful life in accordance with IAS 36.
(Hamberg & Beisland 2014, 60)
IFRS 3 tries to make goodwill a clearer accounting object and different from its
predecessor (IAS 22) IFRS 3 includes the disclosure of goodwill by requiring firms
to supply a qualitative description of the factors that enable goodwill to be
recognised. According to Brännström et al. (2009, 63) IFRS 3 can be considered an
attempt to open the “black box” of goodwill and the related accounting. The idea of
this standard is to provide more information about goodwill, for example, the
expected synergies arising from combining operations or intangible assets that
cannot be recognised separately (Giuliani and Brännström 2011, 162, 164). As
governed by IFRS 3, the accounting treatment of goodwill is one of the most
complex issues in accounting due to the difficulty in knowing how best to identify
and measure it. Indeed, goodwill is an asset which, in practice, encompasses factors
that do not possess the essential characteristics of an asset (Johnson & Petrone
1998), such as overvaluing the company purchased (Sahut et al. 2011, 271).
The adoption of IFRS 3 and IAS 36 has had an impact on goodwill in two ways:
possible re-evaluation and the impairment test for goodwill. This re-evaluation
should impact on stock prices depending on the informative value. (Sahut et al.
2011, 271) Goodwill accounting under IFRS 3 largely relies on managers’ fair value
estimation because goodwill arising from a business combination is no longer
amortised but tested for the impairment annually and whenever events or
circumstances indicate that its value may have been impaired. The impairment of
goodwill should be carried out in accordance with IAS 36. According to IAS 36 the
carrying amount of goodwill has to be written down to the extent of any impairment
32
and the impairment loss should be recognised as an expense.

IFRS 3 also prohibits the pooling of interests method, whose main idea is that the
recognised assets of both entities continued to be stated at their book values prior
to the business combination and no recognised identifiable assets were brought to
account. The idea is that any excess payment above allocated net assets has to be
accounted for as goodwill. The purchase price allocation has not changed
dramatically with the introduction of the IFRS 3 but the demands regarding the
disclosure of goodwill have become more rigorous and for example, a qualitative
description of the factors in goodwill has to be done. (Giuliani and Brännström 2011,
164) Instead of pooling method, IFRS 3 requires all business combinations within
its scope to be accounted for using the acquisition method while IAS 22 permitted
the use of both the pooling method and purchase method. This choice allowed
companies to avoid the recognition of goodwill by structuring a business
combination so that it could be classified as a uniting of interests. (Wiese 2005, 106)

The nature of goodwill is very difficult to quantify and therefore it is difficult to find
an accurate method for measuring goodwill. A problem concerning whether the
goodwill has been impaired is the fact that goodwill does not produce any profit in
isolation. This problem exists because goodwill cannot be identified separately.
Under IFRS goodwill acquired in a business combination is allocated to cash
generating units and an impairment loss is recognised for that unit if its recoverable
amount is less than its carrying amount. After the initial recognition, the acquirer
must measure goodwill at cost less any accumulated impairment losses. (Wines et
al. 2007, 866-867)

The underlying logic for removing the traditional amortisation method is that an
amortisation on a straight-line basis over a set number of years contains no
information about future cash flows to financial report users (Wines et al. 2007;;
Hamberg & Beisland 2014, 61). For example, Clinch (1995) and Jennings et al.
(1996) conclude that there is too little evidence of any association between goodwill
amortisation and share values. Colquitt and Wilson (2002) argue that impairment
33
test will satisfy the need of analysts and the other users of financial statements for
better information about intangible assets as the new treatment does not require
goodwill to be automatically written down without any indication of the decline in the
value of goodwill. According to Waxman (2001) the problem of the amortisation
method also relates to time period estimation as an estimate of the useful life of
goodwill becomes less reliable as the length of the useful life increases.

Amortization allows companies to both apportion the cost of purchasing the goodwill
over its useful lifespan (reflecting consumption of future economic benefits), and to
make its value progressively disappear from the balance sheet. However, the
amortization of goodwill also implies:
• a systematic depreciation of goodwill as well as a finite useful life;;
• a book value for goodwill which has no relation to the economic value of the
company (Jennings et al. 1996);;
• and goodwill depreciation, which does not really represent the loss of value
of the latter (Henning et al. 2000)

Under IFRS and US GAAP accounting the majority of the intangibles identified in
connection with business combinations are subjected to systematic amortisation
and goodwill and other certain assets are subjected to impairment test at least
annually. Due to this fact, goodwill is recognised with very high magnitudes because
impairment test will reduce future expenditures to be recognised and present higher
post-acquisitions earnings per share. (Shalev 2009, 240) The other possible
explanation for why goodwill is highly recognised comparing to other identifiable
intangible assets arising from business combinations are the difficulties and the
costs related to identification and the lack of reliable measurement of many
intangibles. Goodwill is subjected to impairment test and hence, goodwill accounts
the majority of the acquisition cost as this reduces future expenditures. This will also
improve the future performance of the acquirer allowing present higher post-
acquisition earnings. (Watts 2003;; Riedl 2004;; Beatty & Weber 2006;; Ramanna
2008;; Hayn & Hughes 2006;; Hamberg et al. 2011)

34
Hamberg et al. (2011) have examined the effects of IFRS 3 adoption in their
Swedish sample by choosing companies, which have adopted IFRS before the
mandatory adoption in 2005. They find that after the adoption of IFRS 3 reported
earnings increased as a consequence of abolished goodwill amortisations and the
reported goodwill amounts have also increased substantially from 2003 to 2007.
The increase is caused partly by a higher acquisition activity and partly by the
abandonment of goodwill amortisations. So far, this abandonment has not resulted
in increased goodwill impairments.

According to Carvalho et al. (2012, 169) companies do not undertake sufficient
efforts to measure intangible assets acquired in a business combination, such as
IFRS 3 guides. They argue that companies’ attitude to be reluctant to record
intangibles in the balance sheet can be explained by difficulties and costs related to
the identification of intangibles and the lack of reliable measurement of many
intangible assets. Goodwill continues to be recognised with high magnitudes and
the value of identifiable intangible assets in turn is very low. They conclude that
there is a lack of effort of separate identification and disclosure of intangible assets
acquired in a business combination.

Forbes (2007) has examined the application of IFRS 3 in the FTSE 100 for
acquisitions in the first year of adopting IFRS 3. The results showed that over half
(£21 billion) of the acquisition amount (£40 billion) was accounted into goodwill
without an explanation regarding what this £21 billion represented. Shalev (2009)
has investigated business combinations made by nonfinancial S&P 500 companies
and consummated in 2001-2004 and find that the median portion of the purchase
price allocated to the goodwill is 60 percent.

An industry study made by KPMG in 2011 shows that the percentage allocation of
purchase price to goodwill (median) in entertainment and media sector has been
57,2 percent. The study also reveals that the entertainment and media industry has
been one of the industries showing the highest percentage allocation of purchase
price to intangible assets (43,5 percent). The entertainment and media sector
include the print and publishing and film, television and broadcasting sectors. The
35
main intangible assets in the print and publishing sector are customer-related
intangible assets (38,0 percent) and marketing related intangible assets (27,5
percent). In the film, television and broadcasting sector marketing related
intangibles are the most important (14,3 percent). (KPMG 2010)

2.4.2 Fair value accounting of acquired intangible assets

In recent years several accounting standards, including IFRS 3, have been issued
to replace the historical cost approach with fair value measures and providing
management more discretion to determine fair values of the assets for which an
actual market does not exist (Hamberg et al. 2011), and the underlying motivation
behind the fair value accounting is the increased relevance and usability of financial
statements (Lhaopadchan 2010, 121, 125). According to Hitz (2007) the intention of
fair value-based measures is to increase the decision usefulness of accounting
information. He concludes that fair value accounting provides useful information for
decision-making. Benston (2008, 102) notes that the “eventual adoption of fair value
for all assets and liabilities accords with the shift towards a balance sheet rather
than an income statement approach to financial reporting”.

IFRS defines a fair value as “The amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties in an arm’s length
transaction.” In accordance with IFRS 3 if an intangible asset is acquired in a
business combination, the cost of that intangible asset is its fair value fair value at
the acquisition date. (European Commission 2011, 13) The nature of intangibles is
uncertain comparing to tangibles and when estimating the fair value of an intangible
asset, there are several possible outcomes with different probabilities reflecting the
degree of uncertainty. IFRS 13 provides requirements for fair value measurement.

Accounting standard setters around the world have issued standards, which
requires the recognition of balance sheet numbers at fair value and changes in their
fair value in income statement. Many balance sheet amounts have also been made
subject to partial application of fair value rules, which depend on various ad-hoc
circumstances, e.g. goodwill impairments. Accounting standards have changed
36
significantly over the past decade and an increasing emphasis on reporting assets
at fair values (predominantly the current market price of an asset) is now relevant
with intangible assets. The mandatory adoption of IFRS, especially the adoption of
IFRS 3 and IAS 38, has pushed the use of fair value-based numbers. Comparing
fair value accounting to the historical cost alternative, the reliability and relevance of
fair value-based accounting numbers will be maximised when the assets are
actively traded in liquid markets. The possibility for using fair values is greatly
reduced when assets are rarely traded, they are too complex and/or when they are
difficult to identify separately. (Landsman 2007, 19;; Lhaopadchan 2010, 121) This
is particularly true for intangible assets for which obtaining reliable estimates of
future value can be problematic because no ready market exists for many of these
assets (Holthausen & Watts 2001;; Gu & Wang 2005, 1674).

IAS 38 includes some special guidelines for business combinations regarding fair
value measurement;; there is a presumption that the fair value (and the cost) of an
intangible asset acquired in a business combination can be measured reliably. In
accordance with IFRS 3, the cost of an intangible asset acquired in a business
combination is its fair value at the acquisition date. The fair value of an intangible
asset reflects the expectations about the probability of the expected future economic
benefits of an intangible asset that will flow to the entity despite the possible
uncertainty and timing of the inflow. (European Commission 2010, 8)

The basic idea of fair value accounting is that if observable prices are not available
from an active market, current accounting standards allow the reporting entity to
estimate the value of an asset. The increased management discretion is much more
relevant when estimating the value of intangible assets than the value of tangible
assets. One of the key issues is whether fair values of financial statement items can
be measured reliably, and especially for those items which active markets do not
exist. The move from historical cost accounting to fair value accounting implies
increased management discretion when valuing assets. (Landsman 2007, 19-20;;
Lhaopadchan 2010, 121) Rees et al. (1996) highlight that managerial estimation of
fair value is likely to determine the amount of an asset’s impairment due to the
37
absence of quoted market prices for many firm-specific assets and the calculation
of impairment may be subject to manipulation and unreliable due to the
management’s estimation. Still, they conclude that the write-down is an appropriate
response by management to the changes in the firm's economic environment.
Lhaopadchan (2010) examine whether since the introduction of fair value

accounting, particularly in terms of the treatment of acquired goodwill shown on
consolidated balance sheet, criticism on financial statements do not adequately
reflect the value of intangible assets and thus provide misleading information to the
financial statement users. Comparing to the historical cost alternative, the relevance
and reliability of fair value accounting numbers is maximised when the assets
concerned are actively traded in liquid markets and therefore current market prices
are available. The problems of using fair value emerge when the assets are rarely
traded, too complex or they are difficult to identify separately and this is the case of
post-acquisition goodwill. Goodwill is relatively easy to observe at the time of the
acquisition but the post-acquisition changes are much more difficult because the
value of goodwill after the acquisition is not allowed to increase and only impairment
tests are carried out. As goodwill impairments are not based on actively traded
market prices the likelihood of opportunistic behavior increases. (Li & Sloan 2012;;
Ramanna & Watts 2012). Lhaopadchan (2010) finds that despite the presumed
benefits of fair value accounting, earnings management seem to motivate
recognition of acquired goodwill and impairment decisions but also states that this
may not necessary mislead the investors or reduce the value relevance or reliability.

According to IAS 38 the quoted prices in an active market provide the most reliable
estimate of the fair value of an intangible asset. The current bid price is usually the
appropriate market price but if current bid prices are not available, the price of the
most recent similar transactions provide a basis from which to estimate a fair value.
However, it has to be taken into account that there have not been significant
changes in economic circumstances between the transaction date and the asset’s
fair value estimation date. (European Commission 2010, 9)

38
IAS 38 also requires that when there is no active market for an intangible asset, the
fair value of the asset is the amount of the entity would have paid for the asset at
the acquisition date in an arm’s length transaction with the best information
available. To determine this amount, an entity should consider the outcome of recent
transactions for similar assets. Companies purchasing intangible assets may have
developed own techniques for estimating their fair values indirectly. Entities can use
these techniques for the initial measurement of an intangible asset acquired in a
business combination if the objective is to estimate the fair value and they reflect
the current transactions and practices in the certain industry. The techniques can
include, for example, discounting the estimated future net cash flows from the asset
or estimating the costs the entity avoids when it owns an intangible asset. (European
Commission 2010, 9)

Schipper (2005) notes that reported results are likely to have a higher volatility when
using fair value measurements. Landsman (2007) concludes that disclosed and
recognised fair values are informative and investors do benefit from fair value-based
accounting numbers. He also finds that earnings are more volatile under fair value
accounting due to the fact that fair value-based numbers better reflect the the
changing market situations.

The reliability of fair values has been subject to criticism and this is especially the
case with intangible assets. Bart and Landsman (1995) examine the fundamental
issues related to using fair value accounting for financial reporting. They conclude
that in case of perfect and complete markets, the fair value accounting would
provide the best solution but in the case of more realistic market assumptions, fair
value accounting is problematic because it includes three concepts, exit and entry
values and value-in-use, that are not fully understood and require the management
to estimate these values. Penman (2007) critises the fair value accounting and
reminds that the balance sheet focus, which has increased due to the fair value
numbers, is not necessary for the asset valuation because we also have an income
statement.

39
As a conclusion the fair value accounting and fair-value-based accounting numbers

increase transparency and comparability across countries and results in improved
value-relevance and reliability of financial statements but this is true only if the
market for the asset exists and this is the problem concerning intangible assets in
many cases. Using fair values gives more discretion to managers but at the same
time it reduces information asymmetry between stakeholders (and investors) and
managers and gives management a possibility to convey information to the market.

2.4.3 Disclosures related to intangible assets and goodwill

Business combinations are among the largest items in the companies’ investment
activities and the magnitude of business combinations makes the disclosure on
them extremely important (Shalev 20909, 241). Financial statements are among the
most important channels to disclose financial information. Disclosure is important
because it influences the behavior of the investor and supports economic and
investment decisions. (Devalle & Rizzato 2013, 12) Disclosure requirements under
IFRS 3 are quite extensive and they include information about e.g. details of
business combinations and goodwill, recognised assets and liabilities and their fair
values. Disclosure requirements under IFRS 3 can be divided into three areas:
general objectives of the disclosure requirements, business combinations that
require disclosures and minimum disclosure requirements. The expanded
disclosures related to IFRS 3 is expected to enhance transparency and provide
users more useful information about business combinations.

One of the advantages of IFRS 3 related to the disclosure requirements is that this
standard tries to make new intangible assets arising on a business combination
more visible and make goodwill clearer asset to interpret. (Giuliani and Brännström
2011, 164;; Brännström et al. 2009, 66) According to IFRS 3 “An acquirer is required
to disclose information that enables users of its financial statements to evaluate the
nature and financial effect of a business combination that occurs either during the
current reporting period or after the end of the period but before the financial
statements are authorised for issue.”. Among the disclosures related to goodwill and
intangible assets required by IFRS 3 are a description of the factors that make up
40
the goodwill recognised and a qualitative description of the factors that make up the
goodwill recognised, such as expected synergies from combining operations,
intangible assets that do not qualify for separate recognition.

Along IFRS 3 the demands of disclosure have also become more rigorous and some
intangible assets previously categorised within goodwill must be now separately
identified and valued. This allows new intangibles to be recognised and due to this
the amount of goodwill should decrease. In addition, the reporting of a business
combination should be done in a purchase analysis, which is presented in the notes
of the financial statements. IFRS 3 specifies that intangible assets identified at the
date of the acquisition, and as a result an acquirer should measure the value of the
acquired company by recognising assets, liabilities and contingent liabilities at the
fair values and disclose these values in a purchase analysis. According to IFRS 3 a
purchase analysis should be disclosed if the acquisition is significant to the acquirer.
New disclosure regulations under IFRS 3 help companies to better allocate the
purchase price and the appendix of IFRS 3 offers a list of examples of intangible
assets which meet the definition of an intangible asset and should be recognised.
(Brännström and Giuliani 2009, 70;; Brännström et al. 2009, 66) Since the disclosure
of each item is subject to materiality constraint, the magnitude of disclosure is left to
managerial discretion and this may somehow complicate the evaluation of the
completeness of disclosure (Shalev 2009, 242). This also relates to the fair value
accounting.

Brännström and Giuliani (2009) examine how many and what intangibles firms from
two different contexts disclose and find that despite the idea of IFRS 3 to harmonise
accounting for intangibles acquired in a business combinations firms do not disclose
intangibles in the same way. However, they examine only one fiscal year because
the mandatory disclosure was available for one year at the date of the study so the
evidence does not seem very strong. Brännström et al. (2009) examine the
construction of intellectual capital arising on business combinations. They find that
acquired intangibles are value relevant but still, most of the intangible assets are
accounted into goodwill and the variety of acquired identifiable intangible assets
disclosed is big. They find two possible reasons for this big variety: intangible assets
41
are firm-specific and it is not required to find a fixed way to disclose intangibles or
the companies may also rely that stakeholders understand these disclosures.

Shalev (2009) have examined the causes and effects of business combinations’
disclosure level. The sample consists of 830 individual acquisition observations, and
80 percent disclosed the acquired goodwill but only 13 percent of the acquirers
disclosed the factors, which contributed to a purchase price resulted in the
recognition of goodwill. In 43 percent of the business combinations, acquirers
disclosed separately the assets acquired and liabilities assumed and in 34 percent
of the cases, acquirers disclosed the purchase price allocation. Shalev (2009) finds
that disclosure level decreases with the abnormal levels of purchase price allocated
to goodwill because abnormal goodwill can be related to the overpayment or
overstatement of goodwill resulting in increased post-acquisition earnings.
Hayn and Hughes (2006) argue that investors need more detailed information about
business combinations under US GAAP. They examine whether financial
disclosures on acquired entities allow investors to effectively predict goodwill
impairment. This has become more important due to the abolishment of goodwill
amortisation. Certain acquisition characteristics such as the premium paid and the
percentage of the purchase price allocated to goodwill, appear to contribute more
to the prediction of goodwill write-offs than the available disclosures on the acquired
entity in the years subsequent to the acquisition. The disclosure requirements under
US GAAP are very similar to the IFRS disclosure requirements.
2.5 Theoretical evidence for using IFRS accounting for business combinations

Advocates of the IFRS-based approach to goodwill accounting point to a range of
putative benefits associated with the adoption of an impairment testing approach to
goodwill accounting and reporting, including evidence of the improved value
relevance of impairment losses as compared to annual amortisation charges. As
already discussed in the earlier chapters, the reason for the abolishment of goodwill
amortisations is that they do not convey relevant information to the market but still,
42
the majority of national GAAP systems guide that goodwill should be amortised.
Schipper (2003, 64) states that there should be only one permissible accounting
treatment for business combinations and agrees the relevance of purchase method
instead of pooling method. According to her, goodwill should be recognised at fair
value on the date of a business combination and be subject to periodic impairment
testing rather than automatic amortisation.

Those who criticise IFRS impairment approach is pointing at the number of
problems associated with impairment testing regime and fair value accounting for
intangible assets. A major criticism of fair value accounting and goodwill impairment
test are the increased management discretion and accounting biases related to fair
values (e.g. Ramanna 2008;; Riedl, 2004;; Beatty & Weber 2006) Chen et al. (2006)
remind about the lack of evidence that earnings are more value relevant under the
present regime than under the previous capitalise and amortise regime. Impairment
test allows the management more discretion due to the fair value accounting and
impairment test and may lead to manipulations of accounting numbers and
earnings. Accounting conservatism closely relates to the management discretion so
it is examined briefly to support the use of IFRS instead of local accounting systems
which are more conservative and prefer conservatism.

2.5.1 Accounting conservatism

The adoption of IFRS accounting have increased management discretion due to the
introduction of impairment test and fair value-based numbers. The purpose of
conservative accounting system is to ensure that assets are not overstated and
accounting conservatism usually means that bad news will reflect earnings more
quickly than good news (Basu, 1997, 3). Consequently, this reduces management
discretion and the managers’ opportunities to introduce biases (e.g. Watts, 2003;;
LaFond & Watts, 2008), and it also reduces managers’ ability to manipulate earnings
(Chen et al. 2007).
Conservatism accounting means choosing accounting methods and estimates that

keep balance sheet amounts relatively low and in conservative accounting,
43
intangible expenditures are rather expensed than capitalised in the balance sheet.
Conservative accounting affects the quality of the numbers reported on the balance
sheet and the quality of earnings reported on the income statement and may reduce
the quality of accounting information. When a company makes investments,
conservative accounting leads to the situation where reported earnings are
significantly lower than they would have been if the management would have had
more discretion to make more liberal choices. (Penman & Zhang 2002, 238-239,
263)
According to Lev et al. (2005, 981) no accounting system applied can be

conservative or aggressive forever. They argue that if reported earnings under
conservative accounting are undestated during some periods, they will be
overstated in other periods. US GAAP treats certain intangible assets very
conservatively and this has led to the situation where balance sheet amounts have
been distorted for decades and the differences between market values and book
values have continuously increased. (Givoly & Hayn 2002, 71)
All accounting systems exhibit conservatism to some degree and the choice
between conservative accounting and management discretion is not simple due to
the many problems related to the increased management discretion. As already
discussed in the earlier chapters, IAS 38 prohibits to recognise many intangible
assets in the balance sheet due to that they do not meet the recognition criteria.
However, an interesting fact is that all the acquired intangibles can be recognised
in the acquirer’s balance sheet and this reduces the comparability between the
companies for sure.
2.5.2 The effects of the adoption of IFRS on the value-‐relevance of intangible assets

There are many reasons for why over 100 countries have already adopted or are
about to adopt IFRS in the near future. IFRS is considered to provide better quality
and it is more comprehensive than local accounting standards and make financial
reporting more comparable and providing more useful for investors when comparing
companies across markets and countries and also improves transparency. Daske
44
et al. (2008) provide evidence on the positive economic consequences of the

mandatory IFRS reporting in 26 countries around the world, e.g. an increased
market liquidity and a decrease in firm’s cost of capital. The results are also different
depending on the country and this is why the value-relevance is examined from the
perspective of different countries.

Many studies (e.g. Barth et al. 2008;; Devalle et al. 2010;; Schipper 2005) have
reported that adoption of IFRS standards improve informative content of accounting
data and quality. For example, Barth et al. (2008) find that firms adopting IFRS have
less earnings management, more timely loss recognition and more value relevant
earnings and accounting information comparing to those firms that do not apply
IFRS. They also examine whether the application of IFRS is associated with higher
accounting quality. They investigate a broad sample of firms in 21 countries that
adopted IFRS between 1994 and 2003. Devalle et al. (2010) findings are consistent
with Barth et al. (2008) as they examine whether the value relevance of accounting
information increases following the introduction of IFRS for listed companies in five
EU countries (Germany, Spain, France, the UK and Italy) for the period 2002-2007
using regression analysis. Horton and Serafeim (2010) find that IFRS provide timely
value relevant information. They also state that goodwill impairments provide new
value-relevant information to the market.
Jermakowicz et al. (2007) examines DAX-30 companies which have adopted IFRS
and the results suggest that the value relevance of earnings relative to the market
prices increases after the companies adopted IFRS. Despite some problems, e.g.
costly and complex implementation of IFRS, the greater comparability and
transparency are expected. Oliveira et al. (2010) assess the value relevance of
reported identifiable intangible assets and goodwill of non-finance companies listed
in Portuguese Stock Exchange from 1998-2008. A key interest of the study is the
adoption of IAS 38 and IFRS 3 due to the introduction of goodwill impairment regime
and new more prudent intangible assets recognition requirements. They find a
positive effect on the value relevance of goodwill and other intangible assets after
the adoption of IFRS even though they find no change in the value relevance of
intangible assets as a whole. According to them, the conservative nature of IFRS
45
related the recognition of some intangible assets is the reason for why the value-
relevance of intangible assets as a whole has not increased.
Some studies have found that the value relevance of other intangible assets seems
to have been decreasing as IFRS introduced more prudent intangible asset
recognition requirements. For example, Chalmers et al. (2008), consistent with
Oliveira et al. (2010), find that the change from Australian GAAP to IFRS has
increased the value relevance of goodwill but not the value-relevance of identifiable
intangible assets. They find evidence that IFRS conveys value-relevant information
about goodwill because of the introduction of the impairment test and the reason
why identifiable intangible assets have become less value relevant after the
adoption of IFRS is because some identifiable intangible assets, such as brands,
are not recognised under IFRS.
Wines et al. (2007) examine the impacts of new accounting treatment for purchased
goodwill when the impairment test has replaced the goodwill amortisations. They
find that from a balance sheet perspective, the advantage of the impairment testing
is that the valuation of goodwill is closer to a real assessment of asset value and,
from an income statement perspective, a recognition of a loss as a result of an
impairment of goodwill is more aligned to a real economic decline in the value of
goodwill. However, they remind that the identification and valuation of goodwill and
cash-generating units require numerous assumptions to be made in estimating fair
value, value in use and recoverable amount so there this make opportunistic
behavior possible. (Wines et al. 2007, 868)

Gjerde et al. (2008) examine the adoption of IFRS in Norway and find only little
evidence of the increased value relevance under IFRS than national GAAP.
However, they find that the reasons for the little increase in value-relevance are the
goodwill impairment test instead of amortisation and that more assets are measured
at fair values. Their findings are also consistent with the view that capitalising
intangibles is more relevant than expensing them as incurred or through goodwill
amortisations.

46
Sahut et al. (2011) examine the transition to IFRS in Europe and, in particular, the
impact of IAS 38 and IFRS 3 on the quality of financial information on intangible
assets employing multivariate regression models for the sample of 1855 European
listed companies from 2002 to 2007. They find that investors in Europe are
considering that financial information conveyed by capitalised goodwill is less
relevant under IFRS than local GAAP despite the impairment test better reflect the
value of goodwill and firm’s economic situation. According to them, identified
intangibles capitalised in the balance sheet provide more value-relevant information
for shareholders under IFRS than unidentified intangibles transferred into goodwill.
According to Sahut et al. these findings prove that investors in Europe have
understood the capitalisation of intangible assets rather than recording them as
expenditures. These findings also relate to the claims that IFRS may not have
increased the relevance of identifiable intangible assets due to the recognition
criteria, which force the companies to recognise some intangible assets into
goodwill in business combinations.

The recent study of Ji and Lu (2014) investigates both value relevance and reliability
of intangible asset, including goodwill and other intangible assets, in the pre- and
post-adoption periods of IFRS in Australia between 2001-2009. The main result of
their study shows that capitalised intangible assets are value-relevant in both pre-
and post-adoption of IFRS and that the value-relevance is higher in firms with more
reliable information about intangibles in the post-adoption period of IFRS. However,
the positive relationship between the value-relevance and reliability of intangibles
has not changed in the post-adoption period so this also indicate that the adoption
of fair value accounting has not reduced the value reliability.

Busacca and Maccarrone (2007) examine whether and how IFRS improves the
quality of accounting information concerning intangible assets arising on business
acquisitions and intangibles with an indefinite useful life using case study. The
accounting quality is measured through four parameters, which are correctness,
transparency, prudence and timeliness. They find that the quality has improved
measured with transparency and correctness while prudence and timeliness
remained almost unchanged. Hamberg and Beisland (2014) study the effects of
47
changes in accounting treatment for business combinations, and especially goodwill
accounting, under IFRS on the value relevance of accounting information in Europe.
Their results show that goodwill amortisations were not value relevant prior to IFRS
3 and that goodwill balances are positively associated with stock prices in both the
Swedish GAAP and IFRS periods. It is also interesting that goodwill impairments
seem to be value-relevant under Swedish GAAP but not under IFRS. However, they
provide evidence that the increased management discretion is not the reason for
this because management could have behaved opportunistically also before the
adoption of impairment test but they just did not see goodwill accounting for a tool
to manage earnings when amortisation kept book value of goodwill low. The reason
for why goodwill impairments are not value relevant under IFRS in Sweden is rather
related to the institutional factors because Swedish GAAP allowed both impairment
and amortisations.

2.5.3 The value relevance of goodwill impairments and fair values

Accounting for business combinations have changed significantly since the
introduction of IFRS 3. One of the major changes of IFRS for the accounting
treatment for business combinations is the introduction of impairment test for
goodwill and intangible assets with an indefinite useful life. The impairment
approach was introduced by the IASB with the intention to improve the information
content of reported acquired goodwill and provide the financial statement users
value-relevant information that more closely reflects the underlying economic value
of goodwill.

Prior studies related to goodwill amortisations have provided empirical evidence that
systematic amortisation of goodwill over its useful life fails to provide useful
information to the users of the financial statements and making it harder for investors
to use the earnings to predict future profitability (e.g. Jennings et al. 2001;; Moehrle
et al. 2001). Moehrle et al. (2001) find little evidence that goodwill amortisation
contains value-relevant information and argue that the disclosures related to the
48
amortisations were not decision-useful, thereby supporting the FASB’s choice of the
impairment test for goodwill.

With regard to goodwill amortisation, US-focused studies dominate as the changes
to reporting methods precede those in Europe. For example, Chen et al. (2004) find
evidence of increased value relevance as the result of adopting impairment testing
in SFAS 142 and the reported goodwill after the deduction of impairments provides
more value relevant information. Also studies by Henning et al. (2000) and Hirschey
and Richardson (2002) show the relevance of impairment tests on capitalised
goodwill when it is not amortized. Equity capital and the income statement convey
better information about the fluctuating value of the company. Similarly, if a company
announces the impairment of its goodwill, this will result in a fall in its trading price
as investors interpret it as negative information about the future economic benefits
that this asset was supposed to bring.

Recent empirical study by Li et al. (2011) is examining the information content of
transitional goodwill impairments following the adoption of SFAS 142. Li et al.
(2011) provide evidence that both financial analysts and investors revise their
expectations downwards when the impairment loss is announced. According to
them goodwill impairments are the leading indicator of a decline in the future
profitability. Lapointe-Antunes et al. (2009) examine the value relevance and
timeliness of goodwill impairments using retroactive method and find a negative
relationship between reported impairment losses and share price. Their results
provide evidence that fair value measurements can be relevant, even when the
financial statement elements are inherently bound to measurement error and
subject to significant managerial discretion. They also highlight the importance of
auditing due to the fair value accounting.
The results of the study by Chalmers et al. (2011) show that firms’ goodwill
impairment charges better reflect the underlying economic value of goodwill than
amortisation charges and support the accounting regulators decisions to adopt an
impairment test regime for the accounting for goodwill. They examine Australian
companies during the period 1999-2008 with multiple regression models. Chalmers
49
et al. (2012) find that the accounting information under IFRS provides more useful
information especially about reported goodwill in Australia because IFRS 3 requires
an impairment test for goodwill. They study the association between the accuracy
and dispersion of analysts’ earnings forecasts between 1993-2007 using regression
analysis and reported intangible assets. Following the adoption of IFRS these two
have become more negative and it indicates that the accounting information under
IFRS provides more useful information than prior to IFRS adoption.
Goodwill write-down decisions can also be considered as a signal of the company
performance from management to investors. A number of older studies (e.g. Strong
and Meyer 1987;; Elliott and Shaw 1988;; Rees et al. 1996) have shown the existence
of a relationship between write-offs and stock prices. According to Moehrle &
Moehrle (2001) an impairment test promotes transparency because it should reflect
changes in underlying economic or business conditions, not an arbitrary period. As
a result, reporting is based on current events that affect the business. If goodwill is
properly managed, there is no need for the impairment, and in case of something
happens on an ad hoc basis, the impairment test will recognise any reduction in the
value of goodwill.

Despite that many studies provide positive effects about Impairment approach, it
has also been criticised due to the managerial discretion inherently related to the
impairment test. The impairment criteria provided by the standard are drafted in
such a way that it leaves significant room for managerial discretion and biases
(Massoud & Raiborn 2003). For example, Watts (2003, 217) criticises the
impairment approach and argue that “Assessing impairment requires valuation of
future cash flows. Because those future cash flows are unlikely to be verifiable and
contractible, they, and valuation based on them, are likely to be manipulated”.

Barth et al. (2001) and Gu and Wang (2005) show evidence against the critics about
increased management discretion. They remind it is inherently difficult to value
intangible assets because not all intangible assets decline in value and when there
is a decline in value it is very unlike that it will be consistent across all the companies.
This means that providing management discretion to treat intangibles and it can
50
reduce bias and errors related to intangible assets reporting which in turn may
improve value reliability. When an asset is reported with bias the provided
information is not reliable (Dahmash et al. 2009, 121-122). Jennings et al. (1996),
Choi et al. (2000) and Godfrey and Koh (2001) also argue that managerial discretion
is beneficial in the accounting treatment of intangibles because it reduces biases
and errors related to the financial reporting. This also increases reliability as
managers have possibility to convey their private information about the values of
intangibles.

Wyatt (2005) has examined intangible asset recognition in Australian companies in
1993-1997 and finds evidence that “there is value in giving management accounting
discretion to record intangible assets”. This evidence suggests that intangible assets
for which management has the largest discretion, identifiable intangible assets, are
more value-relevant compared to the limited relevance of the regulated classes, like
purchased goodwill. Wyatt argue that limiting management choices to record
intangible assets reduce rather that improve the quality of balance sheet and
investor’s information.

AbuGhazaleh et al. (2012) investigate the value relevance of goodwill impairments
in the UK following the adoption of IFRS 3. They use a multivariate regression for a
sample of 528 firm-year observations for 500 UK listed companies in 2005 and
2006. The empirical results show a significant negative association between
reported goodwill impairments and market value and suggest that these
impairments are perceived by investors to reliably measure a decline in the value of
goodwill and in their firm valuation assessments. The study provides evidence
consistent with the IASB’s objectives in developing the impairment only regime and
support the argument that, through IFRS 3, managers are more likely to use their
accounting discretion to convey private information about the underlying
performance of the company.

As a conclusion, many intangible assets are firm-specific and this is the reason for
the lack of active markets for most of these assets. Giving management discretion
to value these assets have its weaknesses but without the discretion, these assets
51
cannot be seen in the balance sheet and may mislead the investors and other
stakeholders. This possibility to recognise all kinds of intangible assets in the
balance sheet gives a sign that these assets really exist and investors can decide
whether sufficient information is available to make sure the appropriate valuation
and the existence of the asset. The information asymmetry between the
management and stakeholder will not reduce without a possibility to give
management the discretion to disclose this information.

52
3 Accounting treatment for acquired intangible assets in the

media companies

3.1 Research data and description of research process

The objective of the study is to examine how the adoption of IFRS 3 has affected
the accounting treatment of identifiable intangible assets and goodwill acquired in a
business combination in the examined media companies in 2005-2014. Empirical
data consist of consist of Finnish and international listed media companies, which
are Alma Media, Sanoma, Schibsted, Media Group, Modern Times Group and Axel
Springer. Two of the examined companies, Alma Media and Sanoma, are Finnish
listed companies. Alma Media is the smallest of the companies and its net sales
were 295,4 million euros in 2014. Sanoma, Schibsted and Modern Times Group are
almost the same size measured by net sales. Sanoma’s net sales totalled 1901,6
million euros, Schibsted’s net sales were 14975 million NOK (about 1703,8 million
euros) and Modern Times Group’s net sales were 15746 million SEK (about 1683,9
million euros) in 2014. Axel Springer is the biggest company and its net sales were
3037,9 million euros in 2014. As a comparison, Alma Media is classified as a
medium-sized company and Sanoma as a large company on the Helsinki Stock
Exchange. All the companies, except Axel Springer, are Scandinavian companies.
Different companies both Finnish and international and both small and large are
included in the study to get evidence of whether the application of IFRS 3 differs
depending on the size and the country of the company.

The sample of this study has been selected to represent as wide sample as possible
taking into account the limited time to finish this study. Two Finnish companies, Alma
Media and Sanoma, are included due to the possibility to compare two companies
from the same country with different sizes. Sanoma, Schibsted and Modern Times
Group are pretty much the same size but all of them are domiciled in different
countries but still in Scandinavia. Axel Springer is the largest of sample companies
and also the only one domiciled outside Scandinavia. The purpose of sample
53
selection was also to find media companies which have been actively making
business combinations so that the results would be as reliable as possible.

The empirical data is collected from the consolidated financial statements and
annual reports. The collected quantitative data includes the basic financial
statement information that are relevant in the case of the company’s business
combinations. In addition, as the main focus related to the business combinations
is on intangible assets, the financial statement information about intangible assets
and goodwill is also collected. These basic financial statement numbers are
presented to better understand the size, financial situation and the significance of
intangibles and business acquisitions for the examined companies.

The financial statement information data collection includes the amounts of net
sales, operating profits, goodwill and other intangible assets as well as information
about intangible asset amortisations and goodwill impairments. In addition,
purchase price allocations and the related disclosed information was collected from
the notes to the financial statements. The key ratios were calculated from the
collected numbers and the ratios calculated were goodwill to total intangible assets
ratio, total intangible assets to total assets ratio, operating profit margins, goodwill
impairment to total impairment and amortisation to identifiable intangible assets
ratios. In addition to these, the ratios related to purchase price allocations were
calculated and these were goodwill to total acquisition cost, recognised intangible
assets to recognised total assets, total acquisition cost to net sales and the share of
intangible asset fair value adjustments of total fair value adjustments.

First, the development of these key ratios were examined with the descriptive
analysis and the additional information was searched in the notes to the financial
statements. This study also closely examined the disclosures about goodwill and
other identifiable intangible assets arising on business combinations and the
definition of goodwill. In addition, the fair value adjustments made in connection with
business combinations were compared to the carrying amounts if this information
has been available and the shares of intangible assets from these adjustments were
54
also calculated. The companies were analysed detailed one by one before the
comparison and overall findings.

After the firm-specific analysis the averages about the increased amounts of
goodwill and other intangible assets as well as the average percentage shares of
acquisition cost allocated to goodwill, intangible assets from total assets recognised
and total acquisition cost to net sales were calculated. These averages and the
development of the key ratios calculated were analysed and used for the
comparison between the examined companies. This information is presented in the
table. The disclosures related to acquired intangible assets and the fair value
measurement were also examined. Next, the firm-specific analyses are examined
and after that the comparative summary is presented.

The table below presents the basic information about the examined companies’
sizes. Schibsted’s and Modern Times Group’s financial statement numbers are
presented in different currencies than in euro and to translate these balance sheet
amounts into euro, this study uses European Central Bank’s average exchange
rates within one year and for Swedish Krona this rate has been 9,3511 and for
Norwegian Krone 8,7893. The euro numbers are in millions. Schibsted’s average
number of employees was not available in the financial statements so the
approximate number is presented instead.

Table 2. The basic information about the examined companies in 2014
EUR Alma Modern Schibsted Sanoma Axel
million Media Times Springer
Group
Net sales 295,4 1683,9 1703,8 1901,6 3037,9
Total 256,1 1511,2 2033,6 3016,5 5557,7

assets
Average 2813 4059 6800 8259 13917
number of
employees

55
3.2 Alma Media

Alma Media is a Finnish media company focusing on digital services and publishing.
Alma Media’s services have expanded from Finland to other Nordic countries, the
Baltic States and Central Europe. In addition to the news content, Alma Media’s
products provide information related to lifestyle, career and business development.
The parent company Alma Media Corporation is domiciled in Helsinki and the
company’s shares are traded on the Helsinki Stock Exchange. Finland is the biggest
market for Alma Media, and in 2014 about 86,1 percent of the total revenue came
from the Finnish market. Other EU-countries account for a 13,6 percentage share
of the total revenue and other countries only 0,3 percent. Alma Media had on
average approximately 2800 employees in 2014. Alma Media consists of four
business segments: Digital Consumer Services, Financial Media and Business
Services, National Consumer Media and Regional Media. The best-known titles of
Alma Media are Kauppalehti, which is the leading business media in Finland,
Aamulehti and Ilta-Sanomat. (Alma Media annual report 2014, 11, 21, 33)

Alma Media’s balance sheet and income statement information

The role of intangible assets in Alma Media’s balance sheet has increased
significantly. In 2005, intangible assets accounted for 10,8 percent of the balance
sheet’s total assets but in 2014 the corresponding amount was already 42,1 percent.
The highest share was in 2012 when intangible assets accounted for even 48,2
percent of the total assets as Alma Media made several business acquisitions and
acquired e.g. LMC s.r.o. On average, the total intangible assets to total assets ratio
has been 27,9 percent. The increased role of intangibles can be also demonstrated
by stating that the amount of total intangible assets is more than four times bigger
in 2014 than in 2005 while the amount of total assets in the balance sheet has
increased only about 5 percent. These numbers well reflect the changes happening
in the media sector and in the whole global economy as intangibles have become
new value-drivers.
56

Like usually, goodwill is the biggest intangible asset also for Alma Media. The
percentage share of goodwill from total intangible assets has varied between 62,3
and 78,3 percent and the average share has been 71,3 percent. However, it is
interesting to notice that this share has been decreasing since 2011 and between
the year 2012 and 2014 the goodwill to total intangible assets ratio has been about
10 percentage point lower than previous years’ corresponding ratios. One reason
for this may be that Alma Media has realised the objective of IFRS 3 to recognise
more intangible assets separately from goodwill.

Table 3. Alma Media’s balance sheet information (Alma Media annual report 2014,
16, 49;; 2012, 14, 20, 55;; 2010, 8, 10, 29;; 2008, 48, 50, 70;; 2006, 51, 67, 85)
EUR 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
million
Goodwill 18,9 30,2 29,7 33,0 28,2 30,4 30,6 74,3 70,7 69,7
Change in 59,8 11,1 -14,5 7,8 0,7 0,7 142, -4,8 -1,4
goodwill, 8
%
Identifiabl 7,4 9,7 10,2 12,3 10,4 10,5 9,9 43,9 42,2 38,2
e
intangible
assets
Total 26,3 39,9 39,9 45,3 38,6 40,9 40,5 118, 112, 107,
intangible 2 9 9
assets
Goodwill 71,9 75,7 74,4 78,3 73,0 74,3 75,6 62,9 62,3 64,5
to total
intangible
assets, %
Total 243, 199, 181, 166, 155, 184, 198, 245, 272, 256,
assets 6 7 3 9 5 5 0 1 8 1
Total 10,8 20,0 22,0 27,1 24,8 22,2 20,5 48,2 41,4 42,1
intangible
assets to
57
total
assets

When looking at Alma Media’s income statement information presented in the table
4., it can be seen that company’s net sales have been decreasing in 2009, 2013
and 2014 and in other years increased only a little compared to the previous years’
numbers, except in 2006 and 2007. The biggest decline in net sales was -9,8
percent in 2009 and since that year the biggest growth in net sales has been 1,5
percent in 2011. The global financial crisis has naturally affected also on Alma
Media’s business performance. It seems that the year 2009 has been the turning
point.

Impairments have been made more in recent years (between 2012 and 2014) than
in previous years. In 2005, total impairments amounted to 0,2 million and in the year
2014 2,0 million. At the same time the amount of goodwill has increased from 18,9
million to 69,7 million so it is for sure that as the amount of goodwill increases the
amount of impairments also increases. Goodwill impairments naturally account for
a major share of total intangible asset impairments as goodwill is the biggest
intangible asset and on average, they account for 56,6 percent of the total
impairments made. The exception for this is the year 2012, when no goodwill
impairments were made but instead intangible assets with indefinite useful lives
were impaired. It is also good to notice that the amount of impairments has
increased as the net sales have been decreasing. This may indicate that
impairments do convey information to the markets about the company’s future
performance.

The evolution of intangible asset amortisations have also shown an increasing
curve. The exception is the year 2005 when the amount of amortisations was even
22,6 million. After that year, the amount of amortisations has varied between 2,4
and 6,4 million. Still, the increase in intangible asset amortisations has been
moderate comparing to the impairments. The share of amortisations from
58
identifiable intangible assets have been varying between 12,1 and 31,7 percent,
excluding the year 2005.

The amount of identifiable intangible assets in Alma Media’s balance has increased
from 7,4 million to 38,2 million during the examined period. This amount is about
five times bigger at the end of the period in 2014 than in 2005. However, the
intangible asset amortisations have only tripled. This may indicate that more
intangible assets are estimated to have an indefinite useful life which are tested for
impairment under IFRS 3 requirements and/or identifiable intangible assets
recognised are estimated to have longer useful lives.

Table 4. Alma Media’s income statement information (Alma Media annual report
2014, 15, 49;; 2012, 19, 55;; 2010, 9, 29;; 2008, 49, 70;; 2006, 50, 67)
EUR 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
million
Net sales 285, 301, 328, 341, 307, 311, 316, 320, 300, 295,
9 9 9 2 8 4 2 1 2 4
Change in 5,6 8,9 3,7 -9,8 1,2 1,5 1,2 -6,2 -1,6
net sales,
%
Operating 42,3 49,1 64,4 48,3 41,4 43,4 42,0 26,5 27,0 20,7
profit
Operating 14,8 16,3 19,6 14,2 13,5 13,9 13,3 8,3 9,0 7,0
profit
margin, %
Goodwill 0,2 0,0 0,0 0,1 0,0 0,0 0,0 0,0 1,8 1,9
impairment
Total 0,2 0,0 0,0 0,2 0,2 0,0 0,0 1,6 1,9 2,0
impairment
Goodwill 100, - - 50,0 0,0 - - 0,0 94,7 95,0
impairment 0
to total
impairment,
%
59
Amortisatio 22,6 2,4 2,8 2,7 3,3 3,0 2,4 5,3 6,2 6,4
n
Amortisatio 305, 24,7 27,5 22,0 31,7 28,6 24,2 12,1 14,7 16,8
n to 4
identifiable
intangible
assets, %

Alma Media’s business combinations

Business acquisitions are important part of the growth strategy for Alma Media. For
example, in 2012 Alma Media conducted several business acquisitions and the total
acquisition cost was even 24,0 percent of the reported net sales for the year 2012.
On average, the total acquisition cost to net sales ratio has been 5,1 percent even
though the total acquisition cost for 2012 significantly impacts on this ratio.

Identifiable intangible assets recognised in connection with Alma Media’s business
acquisitions play an important role as intangible assets to total assets ratio has
varied between 48,4 and 87,5 percent and the average has been 63,6 percent. This
indicates that business acquisitions are important when adapting to the digital
transformation and changes in the customer preferences. Due to this, the
accounting treatment for acquired intangible asset is a really important.

As stated earlier, goodwill is the most significant intangible asset for Alma Media as
it accounts for a major portion of the total reported intangible assets in Alma’s
balance sheet. This is the case also for the purchase price allocations as the
acquisition cost allocated to goodwill has been 61,0 percent on average. However,
this ratio has varied between 33,3 and 78,4 percent so there are big variations in
the goodwill to total acquisition cost ratios depending on the examined year. Despite
the big variations, this ratio has been decreasing since 2005, with the exception of
the year 2010.

60
The share allocated to goodwill does not depend on the total acquisition cost as in
2012 the acquisition cost has been even 76,7 million, and the share allocated to
goodwill has been 54,5 percent but in 2009, when the total acquisition cost was only
0,9 million, the corresponding share has been 33,3 percent. This may imply that
companies want to recognise intangible assets separately from goodwill but there
are intangible assets that cannot be recognised separately so they have to be
accounted into goodwill. This provides evidence against the claims that companies
are reluctant to recognise intangibles due to the big effort required.

Table 5. Impact of business acquisitions on Alma Media’s assets and liabilities
(Alma Media annual report 2014, 38-39;; 2012, 42-46;; 2010, 24-25;; 2009, 37;; 2008,
64;; 2006, 61;; 2005, 61)
EUR 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
million
Total 4,5 11,1 - 5,8 0,9 3,7 - 76,7 - 9,0
acquisition
cost
% of net 1,6 3,7 - 1,7 0,3 1,2 - 24,0 - 3,0
sales
New 3,4 8,1 - 4,0 0,3 2,9 - 41,8 - 3,9
goodwill
Goodwill to 75,6 73,0 - 69,0 33,3 78,4 - 54,5 - 43,3

total
acquisition
cost, %
Intangible 0,9 2,6 - 2,1 0,5 1,5 - 37,8 - 1,5
assets
Total 1,2 5,5 - 2,4 0,9 2,6 - 51,5 - 3,1
assets
Intangible 75,0 47,3 - 87,5 55,6 57,7 - 73,4 - 48,4
assets to
total
assets, %
61
Total 0,1 2,4 - 0,6 0,3 1,5 - 16,7 - 1,1

liabilities
Net assets 1,1 3,1 - 1,8 0,6 1,1 - 34,8 - 2,0

To deepen the understanding of what kind of intangible assets have been
recognised and which of these assets have already been recognised in the
acquiree’s pre-combination balance sheet, table 6. below presents the carrying
amounts of intangible and total assets in the acquiree’s balance sheet before the
acquisitions and fair values of the recognised assets after the acquisitions. It can be
seen that Alma Media has recognised new intangible assets every year in
connection with the acquisitions. The share of intangible asset fair value
adjustments is clear as they account for 100 percent of the new assets recognised
in connection with business combinations.

In 2014, the carrying amounts were not available and in 2013, 2011 and 2007 there
were no significant acquisitions made. In 2009, the recognised intangible assets
related to customer agreements, in 2012, intangible assets related to trademarks,
customer agreements and ICT-technology, in 2010, they were primarily customer
agreements, in 2008, the recognised intangible assets were trademarks and
customer agreements and in 2006, they related trademarks, customer agreements
and IT-software. (Alma Media annual report 2006, 61;; 2008, 64;; 2009, 37;; 2010, 25;;
2012, 46). In general, trademarks and customer agreements have been the most
significant intangible assets recognised in the business acquisitions. Alma Media
treats acquired trademarks as assets with indefinite useful lives (Alma Media annual
report 2014, 26)

Table 6. Carrying amounts and fair values of acquired assets (Alma Media annual
report 2014, 38-39;; 2012, 42-46;; 2010, 24-25;; 2009, 37;; 2008, 64;; 2006, 61;; 2005,
61)
EUR million 2005 2006 200 2008 2009 2010 201 2012 201 201
7 1 3 4
62
Carrying 0,0 0,0 - 0,0 0,0 0,0 - 8,8 - -

amounts of
intangible
assets
Carrying 0,3 3,0 - 0,3 0,5 1,1 - 22,4 - -
amounts of
total assets
Fair values 0,9 2,6 - 2,1 0,5 1,5 - 37,8 - -
of intangible
assets
Fair values 1,2 5,5 - 2,4 0,9 2,6 - 51,5 - -
of total
assets
Share of 100, 100, - 100, 100, 100, - 100, - -
intangible 0 0 0 0 0 0
asset fair
value
adjustments
, %

Goodwill disclosures

In addition to the balance sheet and income statement numbers and purchase price
allocations, disclosures related to intangible assets are also very relevant to
financial statement users as e.g. the composition of goodwill seems to be unclear
and it is impossible to find out only looking at the balance sheet numbers. As already
noted, IFRS 3 requires to make a qualitative description of the factors that make up
new goodwill recognised, for example synergies. Alma Media has disclosed the
composition of goodwill every examined year and it has been defined in terms of
synergies. There are more simple definitions, e.g. in 2012, goodwill arising on the
acquisitions has been defined as “the expected synergies related to these
businesses” or in 2009, goodwill represents “Contributory factors were the synergies
related to these businesses expected to be realized, and the possibility to expand
63
business operations into new markets.”. (Alma Media annual report 2009, 37;; 2012,
45-46)

There have also been more detailed definitions: “Contributory factors were the
synergies related to these businesses expected to be realized especially with Alma
Media Lehdentekijät Oy, which already belongs to the Group, and the possibility to
broaden the service offering in corporate services”. (Alma Media annual report
2006, 61) Alma Media has also generally defined goodwill in its financial statements
separately from the notes related to business combinations as “the excess of the
acquisition cost over the Group’s share of the net fair values of the acquired
company’s assets at the time of acquisition”. (Alma Media annual report 2012, 30)

As earlier noted, Alma Media has also disclosed almost every year what kind of
intangible assets have been recognized in connection with the business acquisitions
and in some years, (2006-2009) categorised the recognised amounts of intangible
assets. The most important intangibles recognised have been customer
agreements, trademarks and ICT-applications.

3.3 Sanoma

Sanoma is a large Finnish media group, which parent company, Sanoma
Corporation, is domiciled in Helsinki and its shares are traded on the Helsinki Stock
Exchange. Sanoma Group consists of two segments, which are Consumer Media
and Learning and three strategic business units: Media Netherlands, Media Finland
and Sanoma Learning. Sanoma operates in eight countries and had on average
approximately 8200 employees in 2014. Sanoma is the biggest media company in
Finland and the second biggest in Scandinavia. Helsingin Sanomat is the best
known title of Sanoma and it is also the second biggest newspaper in the whole
Scandinavia. Nelonen Media is also part of the group and it onwns e.g. Nelonen,
which is one of the most popular television channels in Finland. The Netherlands is
the biggest market for Sanoma and in 2014, about 42 percent of the revenues came
from there. Finland is the second biggest market with a 38,0 percent share of the
total revenues in 2014. (Sanoma annual report 2014, 4, 8-9, 20)
64

Sanoma’s balance sheet and income statement information

Table 7. presents Sanoma’s relevant balance sheet information. As already
discussed, intangible assets play a major role in the media sector and this is true
also for Sanoma as total intangible assets have accounted for more than a half of
the total assets every examined year. The share of intangibles from total assets has
also been growing as in 2005 about 55 percent of the total assets have been
intangibles and in 2014 they accounted for even 75,0 percent of the total assets.
The average percentage share of intangibles from the total assets has been 63,8
percent. As a comparison, total assets have increased only little compared to the
increase in intangible assets so the change in the composition of the balance sheet’s
assets is clear.

When examining the information related to goodwill and other intangible assets, it
can be seen that goodwill accounts for a major portion of the total intangible assets
as the portion has varied between 75,4 and 80,9 percent. The average share has
been 78,2 percent. However, this ratio shows a decreasing trend despite that the
amount of goodwill in the balance sheet has increased significantly as it is 30
percent bigger in 2014 than in 2005. The share of intangible assets of the balance
sheet’s total assets have been increasing every year since 2005 and at the same
time the goodwill to total intangible assets ratio has been decreasing, which is a
good sign in terms of the requirements of IFRS 3.

Table 7. Sanoma’s balance sheet information (Sanoma annual report 2014, 14, 17;;
2012, 4, 15;; 2010, 3, 15;; 2008, 3, 15;; 2006, 15)
EUR 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
million
Goodwill 1329, 1392, 1432, 1491, 1488, 1447, 2316, 2307, 1964, 1749,
3 3 8 6 9 5 2 6 5 2
Change 4,7 2,9 4,1 -0,2 -2,8 60,0 -0,4 -14,9 -11,0
in
65
goodwill,
%
Identifia 313,0 368,1 379,6 379,7 399,3 403,2 709,8 700,2 641,6 513,3
ble
intangibl
e assets
Total 1642, 1760, 1812, 1871, 1888, 1850, 3026, 3007, 2606, 2262,
intangibl 3 4 4 3 2 7 0 8 1 5
e assets
Goodwill 80,9 79,1 79,1 79,7 78,9 78,2 76,5 76,7 75,4 77,3
to total
intangibl
e assets,
%
Total 2972, 3132, 3192, 3278, 3106, 3203, 4328, 4041, 3514, 3016,
assets 0 2 3 7 3 0 3 6 0 5
Total 55,3 56,2 56,8 57,1 60,8 57,8 69,9 74,4 74,2 75,0
intangibl
e assets
to total
assets,
%

Sanoma’s net sales reflect the difficulties in the media sectors and they have been
decreasing continuously since 2009. The biggest decline compared to the previous
year’s net sales was in 2012 as it can bee seen in the table 8. The percentage
changes in net sales have varied between -13,5 and 6,7 percent and operating profit
margins have varied between 6,7 – 11,7 percent, except the year 2013. The year
2009 seems to be the turning point also for Sanoma Group.

The amount of total impairments has increased significantly since 2005. In 2013,
the total impairments for the year have been even 345,8 million and this amount is
the highest in the examined period. Goodwill impairments account naturally for a
major part of total impairments. The average goodwill impairments to total
66
impairments ratio has been 51,9 percent. In 2009, this ratio has been only 12,7
percent. In 2006 and 2007, there were no goodwill impairments made.

Both impairments and amortisations related to intangible assets have substantially
increased since 2005 as the amount of intangibles has been growing in the balance
sheet. Amortisations have been almost four times bigger and total impairments more
than 30 times bigger in 2014 than in 2005. However, the amount of identifiable
intangible assets, which are amortised systematically unless they are not estimated
to have an indefinite useful life, has doubled but the amount of amortisations have
increased more. Amortisation to total identifiable intangible assets ratio has been
almost unchanged till 2008 and after that increased steadily till 2011 and in 2014,
this ratio was even 45,2 percent. This means that either intangible assets
recognised are estimated to have shorter useful lives or more intangibles have been
recognised as amortisable identifiable intangibles.

Sanoma has made impairments more in those years when the net sales have been
decreasing. This makes sense and one of the reasons for this is the financial crisis.
However, the important observation is that his is not consistent with the claims that
management uses impairments as a tool to manage earnings At the same time, the
amount allocated to goodwill has decreased and this also supports that the
management has not behaved more opportunistically under the impairment test
approach but conversely. Since the year 2011, the net sales have decreased
significantly and in 2012, the drop in net sales comparing to the previous year has
been even 13,5 percent. in 2013, total impairment amounted to 345,8 and the next
year net sales continued to decrease significantly. Also in 2008, the total
impairments have been very high comparing to the previous year’s impairments and
in 2009, the net sales decreased by 8,7 percent and the same happened in 2012 as
net sales decreased significantly and total impairments were exceptionally high the
prior year.

Table 8. Sanoma’s income statement information (Sanoma annual report 2014, 16,
44-45;; 2012, 4, 38;; 2010, 3, 37;; 2008, 3, 35-36;; 2006, 3, 33)
67
EUR 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
million
Net sales 2622 2742 2926 3030 2767 2761 2746 2376 2083 1901
,3 ,1 ,3 ,1 ,9 ,2 ,2 ,3 ,5 ,6
Change 4,6 6,7 3,5 -8,7 -0,2 -0,5 -13,5 -12,3 -8,7
in net
sales, %
Operating 301, 292, 343, 236, 195, 392, 182, 182, - 133,
profit 3 5 8 3 4 7 9 3 257, 8
7
Operating 11,5 10,7 11,7 7,8 7,1 14,2 6,7 7,7 -12,4 7,0
profit
margin, %
Goodwill 1,7 0,0 0,0 61,8 0,7 28,9 63,8 21,5 309, 31,9
impairme 1
nt
Total 1,9 0,3 4,0 84,1 5,5 37,2 83,1 46,5 345, 59,7
impairme 8
nt
Goodwill 89,5 0,0 0,0 73,5 12,7 77,7 76,8 46,2 89,4 53,4
impairme
nt to total
impairme
nt, %
Amortisati 65,3 72,3 80,9 80,7 92,2 96,8 181, 239, 247, 232,
on 3 0 5 2
Amortisati 20,9 19,6 21,3 21,3 23,1 24,0 25,5 34,1 38,6 45,2
on to
identifiabl
e
intangible
assets, %

68
Sanoma’s business acquisitions

“In recent years, Sanoma has grown vigorously through acquisitions.” (Sanoma
annual report 2006, 7). The percentages of total acquisition cost of net sales have
been varying between 0,5 and 6,4 percent. The exception was the financial year
2011 when the total acquisition cost was even 51,5 percent of the net sales as
Sanoma acquired SBS Netherlands. On average, the total acquisition cost to net
sales ratio has been 7,4 percent.

The purchase price allocations differ depending on the examined year;; for example,
in 2014, only 36,6 percent of the acquisition cost was allocated to goodwill but in
turn in 2012, even 85,0 percent of the acquisition cost was accounted as goodwill.
The average purchase price allocated to goodwill has been 59,4 percent in the
examined period. It is difficult to interpret whether this ratio is showing an upward or
downward trend;; six financial years are above the average share and four below.
However, the acquisition cost allocated to goodwill has been only about 35 percent
in 2014 and 2010, so it seems that Sanoma has not been avoiding to recognize
intangibles separately from goodwill. The identifiable intangible assets to total
assets ratio has varied between 28,2 and 78,5 percent and on average, this ratio
has been 52,1 percent. Despite the variations it seems that intangible assets are a
big motivation behind the acquisitions.

Table 9. Impact of business acquisitions on Sanoma’s assets and liabilities
(Sanoma annual report 2014, 32;; 2013;; 30;; 2012, 27;; 2011, 24;; 2010, 26;; 2009, 26;;
2008, 25;; 2007, 27;; 2006, 25;; 2005, 23)
EUR 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
million
Total 167,8 102,3 67,5 190,7 6,7 10,3 1415,2 27,3 10,0 22,7
acquisition
cost
% of net 6,4 3,7 2,3 6,3 0,2 0,4 51,5 1,1 0,5 1,2
sales
69
New 82,3 66,0 42,0 143,4 3,9 3,5 982,0 23,2 6,0 8,3
goodwill
Goodwill to 49,0 64,5 62,2 75,2 58,2 34,0 69,4 85,0 60,0 36,6
total
acquisition
cost, %
Intangible 97,0 48,1 22,4 72,2 1,1 6,2 367,7 10,3 5,4 15,3
assets
Total 222,5 99,8 44,6 108,5 3,9 7,9 710,6 24,8 8,2 32,6
Assets
Intangible 43,6 48,2 50,2 66,5 28,2 78,5 51,7 41,5 65,9 46,9
assets to
total assets
Total 132,8 55,4 20,6 54,2 2,6 1,7 277,3 20,7 4,1 18,2
liabilities
Net assets 89,7 44,4 24,0 54,3 1,3 6,2 433,2 4,1 4,0 14,4

Sanoma has not disclosed the carrying amounts in the acquired unit except for two
significant acquisitions. The most important assets recognised in connection with
the acquisitions have neither been disclosed in 2008-2014. Between 2005 and
2007, the most important assets have been contract-based intangible assets,
customer-based intangible assets, technology-based intangible assets, trademarks
and goodwill. In 2006, the most important assets recognised were technology-based
intangible assets, goodwill, contract-based intangible assets and publishing rights.
(Sanoma annual report 2007, 27;; 2006, 25;; 2005, 23)

In 2008, the largest single transaction for Sanoma was the acquisition of the Polish
educational publisher Nowa Era, and the acquisition cost of the purchase was 62,5
million euros, which was about 33 percent of the total acquisition cost for the
financial year. (Sanoma annual report 2008, 25) The specification of acquired
assets and liabilities of Nowa Era is presented in the table below. Intangible assets
recognised totalled 2,7 million, which is only about 8 percent of the total assets
recognised. Most of the new assets recognised were tangible assets.
70

Table 10. Carrying amounts and fair values of Nowa Era (Sanoma annual report
2008, 26)
EUR million Fair values Carrying amounts
Intangible assets 2,7 2,1
Total assets 34,2 20,3
Total liabilities 26,3 28,9
Net assets 7,8 -8,6
New goodwill 54,6 -
Acquisition cost 62,5 -

In 2005, Sanoma acquired Independent Media 147,8 million which was about 89
percent of the total acquisition cost for the year 2005. The most important assets
recognised were publishing rights. For the majority of these publishing rights a
definite useful life could be determined and the amortisation period was 2-23 years.
For some of the publishing rights a definite useful life could not be determined and
these assets are not amortised but tested for impairment. Intangible asset fair value
adjustments accounted for 100 percent of the total asset fair value adjustments.
(Sanoma annual report 2005, 23)

Table 11. Carrying amounts and fair values of Independent Media (Sanoma annual
report 2005, 23)
EUR million Fair values Carrying amounts
Publishing rights 91,8 0,0
Other intangible assets 0,0 0,0
Total assets 122,1 30,4
Total liabilities 39,9 17,9
Net assets 82,2 12,4
New goodwill 65,6 -
Acquisition cost 147,8 -

71


When it comes to the disclosures, Sanoma has generally defined goodwill as “the
excess of the cost over the fair value of the acquired company’s net assets. Goodwill
represents e.g. expected synergies resulting from acquisitions.” (Sanoma annual
report 2014, 22). In most of the cases, Sanoma has defined goodwill in terms of
synergies. There can be found more general and more detailed definitions;; in 2008,
it is only mentioned that “Goodwill consists of functional and commercial synergies.”
and in 2007, “Goodwill is based on the estimated synergies in the logistics and
merchandising services of press distribution in Finland.” (Sanoma annual report
2007, 27;; 2008, 25) There are also more detailed definitions and one example is
that “Goodwill is related to expanding the operations to new markets as well as
estimated synergies in marketing, call centre operations and other back office
functions, among others”. (Sanoma annual report 2007, 27)

In addition to the synergies, Sanoma has also defined goodwill in terms of human
capital, which is a typical intangible asset that cannot be recognised separately. For
example, in the case of Nowa Era, which is one of the most important acquisitions
made during the examined period, “goodwill consists mainly of the knowledge of
Polish educational market and knowhow of the personnel related to the acquisition
of Nowa Era”. (Sanoma annual report 2008, 26) In 2007, Sanoma purchased
Translation Service Noodi Oy in 2007. The most significant asset recognised at the
acquisition was goodwill, which in this case “represents the capabilities of a well-
trained workforce as well as considerable synergies within the sales and marketing
operations of language services”. (Sanoma annual report 2007, 27)

Sanoma has disclosed that goodwill is one of the most significant assets recognised
in connection with the business acquisitions;; in 2006 Sanoma acquired the
Hungarian educational group Lang Kiado es Holding Zrt and in this case, the most
significant assets recognised were intangible assets and goodwill. This is the case
also with aforementioned Noodi Oy as goodwill was the most significant asset
recognised. (Sanoma annual report 2006, 25)
72

The most important intangible assets recognised in the business combinations for
Sanoma are goodwill and intangible assets. More detailed, Sanoma has mentioned
contract-based intangible assets, technology-based intangible assets, trademarks
and customer-based intangible assets and publishing rights. Sanoma has disclosed
purchase price allocations separately only for three significant acquisitions during
the whole examined period and for two of them Sanoma disclosed also the carrying
amounts in the acquired unit. The most significant acquisition for Sanoma has been
the purchase of SBS Netherlands in 2011, and this acquisition accounted for about
90 percent of the total acquisition cost for the year 2011 (Sanoma annual report
2011, 25).

3.4 Schibsted Media Group

Schibsted Media Group is an international media group and one of the leading
media groups in Scandinavia. In 2014, Schibsted had on average approximately
6800 employees and operations in 31 countries. The parent company Schibsted
ASA is domiciled in Oslo and is listed on the Oslo Stock Exchange. Schibsted is
divided into four operating segments which are Online classifieds, Schibsted Norge
Media House, Schibsted Sverige Media House and Media Houses International.
The major businesses are in Norway, Sweden, France and Spain, but Schibsted
also has operations in other countries in Europe, Latin America, Asia and Africa.
Schibsted owns the tabloid Aftonbladet which is also the biggest tabloid in
Scandinavia and the newspaper Verdens Gang which is the biggest newspaper in
Norway. (2014, 36, 64, 101)

Schibsted’s balance sheet and income statement information

The total intangible assets to total assets ratio has increased significantly for
Schibsted;; in 2005 this ratio was 17,7 percent and in 2014 the corresponding
amount was already 66,9 percent. This change has been dramatic and reflects how
business has changed in the media sector. On average, this ratio has been 51,5
percent. The amount of goodwill is even seven times bigger in 2014 than in 2005
73
and total intangible assets are almost four times bigger but total assets only two
times bigger. In the case of Schibsted, the amount of goodwill and other intangible
assets has increased dramatically from 2005 to 2006 as Schibsted acquired
Schibsted International Classifieds in 2006.

The goodwill to total intangible assets ratio has been decreasing slightly since 2006.
In 2005, this ratio was exceptionally high as it was 82,9. On average, goodwill to
total intangible assets ratio has been 72,0 percent. The amount of goodwill in the
balance sheet has increased more than the amount of identifiable intangible assets
so even though the goodwill to total intangible assets ratio has not decreased
significantly, the o the overall development is good as the increased amount of
goodwill has not resulted in an increase in this ratio.

Table 12. Schibsted’s balance sheet information (Schibsted annual report 2014, 36,
96, 118;; 2012, 107, 127;; 2010, 132, 168;; 2008, 83, 105;; 2006, 73, 93)
NOK 200 2006 2007 2008 2009 2010 2011 2012 2013 2014
million 5
Goodwil 116 5762 6003 5282 4941 6919 6878 6452 7320 8294
l 5
Change 394,6 4,2 -12,0 -6,5 40,0 -0,6 -6,2 13,5 13,3
in
goodwill
, %
Other 241 2287 2090 2335 2281 2809 2733 2661 3017 3672
intangib
le
assets
Total 140 8049 8093 7617 7222 9728 9611 9113 1033 1196
intangib 6 7 6
le
assets
Goodwil 82,9 71,6 74,2 69,3 68,4 71,1 71,6 70,8 70,8 69,3
l to total
intangib
74
le
assets,
%
Total 793 1654 1599 1639 1522 1650 1633 1535 1715 1787
Assets 5 9 1 1 0 9 6 0 9 4
Total 17,7 48,6 50,6 46,5 47,5 58,9 58,8 59,4 60,2 66,9
intangib
le
assets
to total
assets,
%

Schibsted’s net sales has increased significantly in 2006 and 2007. The year 2009
has been the most difficult during the examined period as the net sales dropped by
7,2 percent comparing to the previous year’s net sales. However, despite the years
2009 and 2014, the net sales have increased. On average, the net sales have
increased 5,1 percent every year. Net sales dropped by 7,2 percent in 2009 but in
turn, the next year they increased 8,0 percent. Schibsted’s net sales have not been
impacted by the financial crisis very strongly, but the year 2009 seems to have been
the most difficult.

Goodwill impairments have been on average 53,4 percent of total impairments. In
2008, the amount of impairments totalled 1558 million and the same year operating
profit was negative and the next year the net sales saw the worst drop during the
examined period as they declined 7,2 percent. The variations in total impairments
have been big but the amount of amortisations have increased steadily. Still, when
investigating intangible asset amortisations more carefully, it can be noted that the
percentage share of amortisations from identifiable intangible assets has increased
till 2009, except the year 2005, and after that year decreased steadily. This indicates
that more intangibles are estimated to have useful lives between 2010 and 2014
and this is probably due to that most of the intangible assets are trademarks with
indefinite useful lives.
75

Table 13. Schibsted’s income statement information (Schibsted annual report 2014,
94, 118;; 2013, 92, 116;; 2012, 106, 127;; 2011, 102, 124;; 2010, 130, 168;; 2009, 44,
62;; 2008, 82, 105;; 2006, 72, 93)
NOK 200 2006 2007 2008 2009 2010 2011 2012 2013 2014
million 5
Net sales 983 1164 1361 1374 1274 1376 1437 1476 1523 1497
2 8 0 0 5 8 8 3 2 5
Change in 18,5 16,8 1,0 -7,2 8,0 4,4 2,7 3,2 -1,7
net sales,
%
Operating 116 2495 1246 -254 435 3410 1439 744 2201 510
profit 1
Operating 11,8 21,4 9,2 -1,8 3,4 24,8 10,0 5,0 14,4 3,4
profit
margin, %
Goodwill 0 10 8 1388 80 77 120 350 0 4
impairmen
t
Total 8 10 33 1558 137 92 185 357 17 26
impairmen
t
Goodwill 0,0 100, 24,2 89,1 58,4 83,7 64,9 98,0 0,0 15,4
impairmen 0
t to total
impairmen
t, %
Amortisati 54 133 247 287 324 254 211 196 219 205
on
Amortisati 22,4 5,8 11,8 12,3 14,2 9,0 7,7 7,4 7,3 5,6
on to
identifiable
intangible
assets, %

76

Schibsted’s business acquisitions

“The business combinations are carried out as part of Schibsted’s growth strategy,
and the businesses acquired are good strategic fits with existing operations within
the Schibsted Media Group.” (Schibsted annual report 2014, 110) On average, total
acquisition cost has been 9,8 percent of the year’s net sales. This indicates, that
Schibsted has also been actively participating in business acquisitions during the
last ten years. In 2006, Schibsted made a significant purchase and acquired
Schibsted International Classifieds and in that year the total acquisition cost was
even 44 percent of the net sales.

In 2007, investments in subsidiaries were not significant and Schibsted has not
separated the amount invested in subsidiaries and the only business acquisition
mentioned is the purchase of Stockholm-Köpenhamn Produktion AB so the
information related to this acquisition has been used. In 2008, information related to
to the acquisition cost, goodwill and intangible assets was only available. In 2009,
all the acquisitions were minor and due to this no purchase price allocations were
disclosed. Media Norge was established in 2009 and the major share of goodwill
relates to this arrangement. Schibsted disclosed the table about the effects of the
establishment on the group’s balance sheet. (Schibsted annual report 2009, 54-55)

The average share of total acquisition cost allocated to goodwill has been 72,7
percent. In 2008 and 2014, total acquisition cost allocated to goodwill has been
around 50 percent and the highest amount has been 85,8 percent in 2006. For
Schibsted, a decreasing trend can be noted in the shares allocated to goodwill. The
intangible assets recognised in connection with the business acquisitions have
represented even 94,5 percent of the total assets recognised. The average share of
intangibles from the total assets recognised has been 60,2 percent.

Table 14. Impact of business acquisitions on Schibsted’s assets and liabilities
(Schibsted annual report 2014, 110;; 2013, 108;; 2012, 120;; 2011, 115;; 2010, 154;;
2008, 94, 122;; 2007, 82;; 2006, 79;; 2005, 83)
77
NOK million 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total 414 5178 52 255 - 3339 149 221 404 1140
acquisition cost
% of net sales 4,2 44,5 0,4 1,9 - 24,3 1,0 1,5 2,7 7,6
New goodwill 350 4444 38 138 - 2625 115 158 314 591
Goodwill to 84,5 85,8 73,1 54,1 - 78,6 77,2 71,5 77,7 51,8
total
acquisition
cost, %
Intangible 75 1969 13 61 - 869 68 46 87 537
assets
Total Assets 202 2754 - - - 1117 106 204 162 568
Intangible 37,1 71,5 - - - 77,8 64,2 22,5 53,7 94,5
assets to total
assets
Total liabilities 138 2020 - - - 386 32 106 69 14
Net assets 64 734 - - - 731 74 98 93 554


Schibsted has defined goodwill in terms of synergies, workforce and non-contractual
customer agreements in most of the cases and there are two different definitions of
goodwill used: the first definition is that “The goodwill recognised is attributable to
inseparable non-contractual customer relationships, the assembled workforce of the
companies and synergies.” (Schibsted annual report 2014, 110;; 2013, 108;; 2012,
120;; 2011, 115) and the second one is that “Amounts allocated to goodwill will
mainly relate to the acquired companies’ market position, work force and synergies
with the group’s other activities.” (Schibsted annual report 2005, 83;; 2006, 80;; 2007,
82).

As already noted, workforce is a typical item in goodwill because it cannot be
accounted separately. A more detailed definition was made for the acquisition of
Editions Aixoises Multimedia, but not for any other significant purchases. In the case
78
of Editions, goodwill arising on the acquisition is “attributable to non-contractual

private customer relationships, the assembled workforce of the company and a
control premium connected to the possibility of broadening the presence in the
French market, faster decision making, greater possibility for synergies and future
developments”. (Schibsted annual report 2010, 153)

Schibsted has not disclosed the carrying amounts of the acquiree’s pre-combination
balance sheet but the company has classified acquired intangible assets between
2010 and 2014 and they are presented in the table below. Most of these intangibles
recognised are trademarks with indefinite useful life. In addition to trademarks,
customer relations and data systems and licenses have also been recognised.

Table 15. Specification of acquired intangible assets (Schibsted annual report 2014,
110;; 2013, 108;; 2012, 120;; 2011, 115;; 2010, 154)
NOK million 2010 2011 2012 2013 2014
Trademarks (indefinite useful life) 756 54 5 48 495
Trademarks (definite useful life) - - - 4 -
Customer relations 78 - 5 6 34
Data systems and licenses 35 14 36 29 8
Total intangible assets 869 68 46 87 537

3.5 Modern Times Group

Modern Times Group is an international entertainment group, which has operations
in six continents and 11 countries and they include free-TV, pay-TV, digital
entertainment, radio and content production businesses. Modern Timed Group is
headquartered in Stockholm and the parent company Modern Times Group MTB
AB is listed on the Stockholm Stock Exchange and headquartered in Stockholm.
The main markets of Modern Times Group are Scandinavia and the Baltics. In 2014,
Modern Times Group had on average approximately 4000 employees. Modern
Times Group consists of six business segments which are Free-TV Scandinavia,
Pay-TV Nordic, Free-TV Emerging Markets, Pay-TV Emerging Market, CTC Media
79
and the sixth business segment includes Nice, MTGx and Radio businesses.
Modern Timed Group owns the well-known company Viasat. (Modern Times Group
annual report annual report 2014, 7, 11)

Modern Times Group’s balance sheet and income statement information

The changes in total intangible assets to total assets ratio has been quite volatile.
In 2005, the ratio was 22,5 percent and in 2014, 30,7 percent so the share of
intangibles from total assets has increased but not so dramatically. The amount of
intangibles increased from 32,9 percent to 54,0 percent in 2008, when Modern
Times Group acquired Nova Televizia and Gymgrossisten and this share has been
the highest for Modern Times during the examined period. However, the amount of
intangibles in the balance sheet is now double comparing to the amount in 2005 but
this amount has increased more than the amount of total assets comparing to the
years 2005 and 2014.

The average goodwill to total intangible assets ratio has been 79,0 percent. The
changes in this ratio are small and the development shows no clear signs of neither
downward or upward trend. In most of the years examined the ratio has been around
80 percent. In 2006, this ratio was 71,9 percent, which is the lowest share.

Table 16. Modern Times Group’s balance sheet information (Modern Times annual
report 2014, 55;; 2012, 68;; 2010, 53;; 2008, 55;; 2006, 66)
SEK 200 200 2007 2008 2009 2010 2011 2012 2013 2014
million 5 6
Goodwill 181 223 2491 8798 5239 4928 2447 2866 3463 3396
4 5
Change 23,2 11,5 253,2 -40,5 -5,9 -50,3 17,1 20,8 -1,9
in
goodwill,
%
Identifiabl 950 874 1109 1583 1423 1183 582 575 841 941
e
80
intangible
assets
Total 220 310 3600 1038 6662 6111 3029 3441 4304 4337
intangible 4 9 1
assets
Goodwill 82,3 71,9 69,2 84,8 78,6 80,6 80,8 83,3 80,5 78,3
to total
intangible
assets, %
Total 979 920 1095 1923 1465 1400 1128 1169 1410 1413
assets 6 5 8 2 1 2 1 2 7 1
Total 22,5 33,8 32,9 54,0 45,4 43,6 26,9 29,4 30,5 30,7
intangible
assets to
total
assets, %

Modern Times Group’s net sales has grown 8,2 percent on average during the
examined period. The biggest drop was in 2009 when the net sales decreased by
5,6 percent. Before the year 2009 the development of net sales has been really
good but after 2009, the net sales have been increasing again slowly.

Intangible asset amortisations have been volatile and there cannot be found a clear
direction of the development but there is neither big variations. Total impairments
have been made much more in 2009 and 2011 than other years, when these
amounts amounted to even 3293 and 2990 million. It can be seen that operating
profit has also been negative only in 2009 and 2011. The net sales decreased
dramatically measured by percentage points from 2008 to 2009 and increased 5,4
percent in 2010 but it is clear that prospects diminished significantly as the change
in net sales shows and due to the fact that impairments were made in 2009 and not
already in 2010 which would already have already been too late.

81
Table 17. Modern Times Group’s income statement information (Modern Times
annual report 2014, 54, 86;; 2012, 67, 96;; 2010, 52, 80;; 2008, 54, 82;; 2006, 65, 83)
SEK 200 2006 2007 2008 2009 2010 2011 2012 2013 2014
million 5
Net sales 801 1013 1135 1316 1242 1310 1347 1333 1407 1574
2 7 1 6 7 1 3 6 3 6
Change in 26,5 12,0 16,0 -5,6 5,4 2,8 -1,0 5,5 11,9
net sales,
%
Operating 121 1778 2027 3671 - 2355 -615 2124 1738 1675
profit 3 1553
Operating 15,1 17,5 17,9 27,9 -12,5 18,0 -4,6 15,9 12,3 10,6
profit
margin, %
Goodwill 1 38 0 76 3252 0 2441 0 145 205
impairmen
t
Total 24 87 13 92 3293 9 2990 15 148 224
impairmen
t
Goodwill 4,2 43,7 0,0 82,6 98,8 0,0 81,6 0,0 98,0 91,5
impairmen
t to total
impairmen
t, %
Amortisati 72 59 86 76 105 101 85 34 46 61
on
Amortisati 7,6 6,8 7,8 4,8 7,4 8,5 14,6 5,9 5,5 6,5
on to
identifiable
intangible
assets, %

82

Modern Times Group’s business acquisitions

On average, the share of the total acquisition cost of the year’s net sales has been
10,3 percent. In 2008, this share was even 47,9 percent as Modern Times Group
acquired Nova Televizia and Gymgrossisten. The average amount of acquisition
cost allocated to goodwill has been 85,6 percent. However, except the year 2012,
the trend seems to be decreasing and less intangible assets have been accounted
into goodwill even though the development is not obvious as there were no
acquisitions made in 2009 and 2011 and 2010 and 2013 the information about the
business acquisitions was not sufficient. The identifiable intangible assets to total
assets ratio has been varying between 8,8 and 70,1 percent so

In 2005, Modern Times Group has specified the acquired assets and liabilities only
for the most significant purchase, which accounts for about 97 percent of the total
acquisition cost for the year 2005 so the purchase price allocation is presented only
for this acquisition. In 2009 and 2011, there were no business acquisitions and the
years 2010 and 2013 the goodwill to total acquisition cost ratios cannot be
calculated due to the negative net assets.

Table 18. Impact of business acquisitions on Modern Times Group’s assets and
liabilities (Modern Times Group’s annual report 2014, 77;; 2013, 82;; 2012, 88;; 2010,
74;; 2008, 76;; 2007, 89;; 2006, 79;; 2005, 58)
SEK million 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total 904 731 265 6306 - 327 - 467 732 365
acquisition cost
% of net sales 11,3 7,2 2,3 47,9 - 2,5 - 3,5 5,2 2,3
New goodwill 867 508 223 5462 - 373 - 458 818 290
Goodwill to 95,9 69,5 84,2 86,6 - - - 98,1 - 79,5
total
acquisition
cost, %
83
Identifiable 249 420 46 780 - 17 - 28 284 90

intangible
assets
Total assets 483 631 134 1113 - 111 - 318 776 273
Identifiable 51,6 66,6 34,3 70,1 - 15,3 - 8,8 36,6 33,0
intangible
assets to total
assets, %
Total liabilities 409 307 84 269 - 159 - 190 863 168
Net assets 74 325 49 844 - -46 - 127 -87 107

Between 2009 and 2014 Modern Times Group did not disclose carrying amounts of
assets or what kind of intangible assets were recognised. In 2008, the most
significant intangible assets recognised were broadcasting licenses, trademarks. In
2007, 2006 and 2005 the most important assets recognised were trademarks.
Trademarks being part of purchase price allocations are normally determined to
have indefinite useful lives. (Modern Times Group annual report 2008, 67, 75;; 2007,
86;; 2006, 79;; 2005, 58)

Table 19. Carrying amounts and fair values of acquired assets (Modern Times
Group annual report 2008, 76;; 2007, 89;; 2006, 79;; 2005, 58)
SEK million 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Carrying 68 102 5 79 - - - - - -
amounts of
identifiable
intangible
assets
Carrying 302 314 93 412 - - - - - -
amounts of
total assets
Fair values 249 420 46 780 - - - - - -
of
identifiable
84
intangible
assets
Fair values 483 631 134 1113 - - - - - -
of total
assets
Share of 100,0 100,0 100,0 100,0 - - - - - -
identifiable
intangible
asset fair
value
adjustments,
%

Modern Times Group has defined goodwill in terms of synergies and unidentified
intangible assets, for example, “The goodwill comprises future potential new
customers and programmes as well as brand extensions and assembled work
force.” (Modern Times Group annual report 2014, 78) or “Goodwill has arisen on the
acquisitions since among others customer relations or trademarks did not meet the
criteria for recognition as an intangible asset at the date of the acquisition.” (Modern
Times Group annual report 2005, 58)
Goodwill arising on the acquisition of Prva TV in 2006 has been disclosed separately
and defined as “customer relations, broadcasting licenses, trademarks or other
beneficial rights did not meet the criteria for recognition as an intangible asset at the
date of the acquisitions”. (Modern Times Group annual report 2006, 79)
As a summary, Modern Times Group has defined goodwill in terms of synergies and
intangible assets that do not meet the recognition criteria. These kinds of intangible
assets have been customer relations, trademarks and human capital which are
prohibited to recognise as assets under the current recognition criteria and in a
business combination, these assets has to be accounted into goodwill.

85
3.6 Axel Springer Group

Axel Springer is one of the leading publishing companies in Europe. The parent
company Axel Springer SE is listed on the Frankfurt Stock Exchange and
headquartered in Berlin. Axel Springer’s business is divided into three segments:
Paid Models, Marketing Models and Classified Ad Models. The focus is on the digital
transformation of the business and the company wants to become a leading digital
publisher. At the moment digital media channels contribute almost three quarters of
total revenues. Axel Springer operates in more than 40 countries and had on
average almost 14000 employees in 2014. Germany is the most important market
for Axel Springer and this market accounts for 56,9 percent of the group’s total
revenue. Axel Springer has many news brands, such as BILD, WELT and FAKT.
(Axel Springer annual report 2014, 3, 12, 94)

Axel Springer’s balance sheet and income statement information

Like for many other media companies, the role of intangible assets has increased
continuously also in Axel Springer’s balance sheet. In 2005, intangible assets
accounted for only 5,0 percent of total assets and in 2014, the corresponding
amount was already 54,3 percent. The increase is significant as the amount of
goodwill is 30 times bigger in 2014 than in 2005 and the amount of total intangible
assets is more than 20 bigger. Only for the comparison, the amount of total assets
in the balance sheet is only twice as big in 2014 than in 2005.

On average, the goodwill to total intangible assets ratio has been 53,4 percent.
However, the development shows that goodwill has been accounting for a bigger
share of total intangible assets as in 2005, the ratio was 43,3 percent but in 2014, it
was already 56,4 percent. This is contrary to the objectives of IFRS 3 to reduce the
amount of goodwill in the balance sheet.

Table 20. Axel Springer’s balance sheet information (Axel Springer annual report
2014, 89, 114;; 2012, 84, 107;; 2010, 119, 138;; 2008, 112, 133;; 2007, 88, 97;; 2006,
78, 85;; 2005, 68, 75)
86
EUR 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
million
Goodwill 56,7 108,5 363,8 421,4 459,1 565,8 1087, 1296, 1327, 1703,
9 7 1 4
Change 91,4 235,3 15,8 8,9 23,2 92,3 19,2 2,3 28,4
in
goodwill,
%
Identifia 74,2 81,9 340,9 316,6 376,4 549,8 820,4 1158, 1084, 1314,
ble 8 4 9
intangibl
e assets
Total 130,9 190,4 704,7 738,0 835,4 1115, 1908, 2455, 2411, 3018,
intangibl 6 3 5 5 3
e assets
Goodwill 43,3 57,0 51,6 57,1 55,0 50,7 57,0 52,8 55,0 56,4
to total
intangibl
e assets,
%
Total 2612, 3124, 3826, 2812, 2934, 3603, 4187, 4808, 4773, 5557,
assets 0 0 9 6 3 2 5 2 8 7
Total 5,0 6,1 18,4 26,2 28,5 31,0 45,6 51,1 50,5 54,3
intangibl
e assets
to total
assets,
%

Axel Springer’s net sales have been quite turbulent and there have been big
changes in the net sales during the examined period. In the year 2009, which seems
to be the most difficult year for the examined companies, net sales dropped by 4,3
percent but next year they increased by 10,8 percent and again in 2013 they
decreased even 15,4 percent and increased 8,4 percent the next year.
87

Goodwill impairments are 44,3 percent of total impairments on average. In general,
there seems to be more impairments have been made since 2009 and the amount
of total impairments amounted to 50,5 million in 2014. In 2008, total impairments
were 30,8 million and the next year net sales dropped by 4,3 percent and in 2012
total impairments totalled 21,5 million and the next year the net sales collapsed by
even 15,4 percent. This indicates that impairment reflect the development of net
sales. Amortisation to identifiable intangible assets ratio has stayed quite stable
during the examined period and only a little downward development can be noticed,
which may indicate that more intangibles with indefinite useful lives have been
recognised. The highest ratio was 15,1 percent in 2005 and in 2007, the share
halved but since that there have not been any significant changes.

Table 21. Axel Springer’s income statement information (Axel Springer annual
report 2014, 91, 135;; 2012, 86, 124;; 2010, 120, 153;; 2008, 114, 150;; 2006, 80, 103)
EUR 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
million
Net sales 2391 2375 2577 2728 2611 2893 3184 3310 2801 3037
,5 ,9 ,9 ,5 ,6 ,9 ,9 ,3 ,4 ,9
Change -0,7 8,5 5,8 -4,3 10,8 10,1 3,9 -15,4 8,4
in net
sales, %
Operating 390, 377, 420, 749, 422, 408, 444, 447, 289, 335,
profit 4 7 7 8 7 9 5 9 9 8
Operating 16,3 15,9 16,3 27,5 16,2 14,1 14,0 13,5 10,3 11,1
profit
margin, %
Goodwill 7,9 1,0 0,0 2,1 0,0 0,0 7,8 17,4 2,7 31,1
impairme
nt
Total 7,9 2,4 0,4 30,8 1,7 2,2 8,4 21,5 4,6 50,5
impairme
nt
88
Goodwill 100, 41,7 0,0 6,8 0,0 0,0 92,9 80,9 58,7 61,6
impairme 0
nt to total
impairme
nt, %
Amortisati 11,2 10,7 22,1 31,1 38,2 48,9 68,1 85,5 90,7 111,
on 2
Amortisati 15,1 13,1 6,5 9,8 10,1 8,9 8,3 7,4 8,4 8,5
on to
identifiabl
e
intangible
assets, %

Axel Springer’s business combinations

Business combinations have had a significant impact also on Axel Springer’s
performance, especially in 2007, when the total acquisition cost was even 42,9
percent of net sales of the group as Axel Springer conducted few significant
acquisitions. The average percentage share of the total acquisition cost from net
sales is 14,4 percent, and this share have increased significantly from 2005 to 2014.

A major share of intangible assets recognized in a business combination is allocated
to goodwill and like other examined companies, also Axel Springer has had big
differences depending on the examined year. The average share allocated to
goodwill is 59,2 percent but the share allocated to goodwill has been decreasing
since 2005 when the share allocated to goodwill was 88,0 percent but in 2014 the
corresponding share was 61,0 percent. In the case of Axel Springer, the change can
be seen even though in 2012 this share was more than 80 percent. It is also in
interesting observation that despite the amount of goodwill in the balance sheet has
increased the development is contrary to the development of the total acquisition
cost allocated to goodwill.

89
Intangible assets arising on business combinations account for a significant share
of the total assets recognised. In six years this share has been more than 70 percent
out of nine years since 2005 there were no acquisitions made and every year more
than a half of total recognised assets. The average share of intangible assets has
been 68,8 percent.

Table 22. Impact of business acquisitions on Axel Springer’s assets and liabilities
(Axel Springer annual report 2014, 97-101;; 2013, 95-96;; 2012, 92-95;; 2011, 125-
126;; 2010, 126-127;; 2009, 142;; 2008, 121;; 2007, 100-104;; 2006, 88)
EUR 200 200 2007 200 2009 2010 2011 2012 2013 2014
million 5 6 8
Total - 60,0 1106, 22,4 86,6 301, 751, 675, 123, 654,
acquisition 7 0 1 6 6 3
cost
% of net - 2,5 42,9 0,8 3,3 10,4 23,6 20,4 4,4 21,5
sales
New - 52,8 937,2 13,0 38,6 101, 531, 230, 71,6 399,
goodwill 9 5 6 4
Goodwill - 88,0 84,7 58,0 44,6 33,9 70,7 34,1 57,9 61,0
to total
acquisition
cost, %
Identifiabl - 10,3 313,0 9,8 87,6 229, 278, 360, 61,2 300,
e 1 7 3 3
intangible
assets
Total - 13,7 616,3 12,9 168, 452, 358, 450, 73,5 413,
assets 9 1 0 4 3
Identifiabl - 75,2 50,8 76,0 51,9 50,7 77,9 80,0 83,2 72,7
e
intangible
assets to
total
assets, %
90
Total - 6,5 400,0 2,7 83,7 103, 153, 119, 21,3 153,
liabilities 6 0 9 6
Net assets - 7,2 216,3 10,2 85,2 348, 205, 330, 52,0 260,
5 3 5 1

In 2014, Axel Springer did not disclose carrying amounts or specified the recognised
intangible assets but purchased rights and licenses account for a major part of all
the identifiable intangible assets (Axel Springer annual report 2014, 114). These
purchased assets and liabilities are examined more detailed in connection with the
disclosures but as it can be seen in the table below fair value adjustments mostly
relate to intangible assets.

Table 23. Carrying amounts and fair values of acquired assets (Axel Springer
annual report 2013, 95-96;; 2012, 92-95;; 2011, 125-126;; 2010, 126-127;; 2009, 142;;
2008, 121;; 2007, 100-104;; 2006, 88)
EUR 200 2006 2007 2008 2009 2010 2011 2012 2013 201
million 5 4
Carrying - 2,4 41,6 0,3 8,6 14,5 1,5 13,1 1,1 -
amounts of
identifiable
intangible
assets
Carrying - 5,9 302, 3,4 93,2 224, 80,5 103, 13,4 -
amounts of 7 8 2
total assets
Fair values - 10,3 313, 9,8 87,6 229, 278, 360, 61,2 -
of 0 1 7 3
identifiable
intangible
assets
Fair values - 13,7 616, 12,9 168, 452, 358, 450, 73,5 -
of total 3 9 1 0 4
assets
91
Share of - 100, 86,6 100, 94,2 77,4 100, 100, 100, -

identifiable 0 0 0 0 0
intangible
asset fair
value
adjustments
, %


Axel Springer has defined goodwill in terms of synergies and human capital and
there have been two different definitions during the examined period: e.g. in 2014
and 2013 “Goodwill is above all attributable to inseparable values such as employee
expertise, expected synergy effects from the integration and the strategic
advantages resulting from the leading market position of the acquired company.”
(Axel Springer annual report 2014, 99;; 2013, 95) The other definitions is that “The
goodwill arising on these transactions can be credited mainly to the positive
expectations for the future business performance of the respective companies.”
(Axel Springer annual report 2008, 121)
Axel Springer has disclosed the purchase price allocations for the most significant
acquisitions separately between 2009-2014 and there is no one table which
aggregate all the acquisitions. This is the reason why the impact of minor
acquisitions is excluded. However, due to the size of the group this will not affect
the key ratios significantly.
In 2008 and 2006, the purchase price allocation of all the business combinations
has presented in a one table. In 2007, Axel Springer has also disclosed purchase
price allocations of the minor acquisitions separately.
Axel Springer has not disclosed the amounts of different intangible assets
recognised have but the company has separated the amount of intangibles with
indefinite useful lives, which are mostly trademarks and customer relationships;;
92
“The purchased rights and licenses mainly comprised title rights, trademarks, and
customer relationships.” (Axel Springer annual report 2014, 115)
3.7 The main findings and discussion

One of the main findings of this study is that the importance of intangible assets in
the examined media companies’ balance sheet has increased during the examined
period. Sanoma has seen the lowest changes in balance sheet amounts of
intangible assets and goodwill as goodwill has increased 31,6 percent and total
intangible assets 37,8 percent while the total assets have increased only 1,5 percent
comparing the years 2005 and 2014. The direction is clear and intangibles have
become more and more important even though these percentages are not as clear
as e.g. in the case of Axel Springer which has met the highest growth in the amounts
of goodwill and intangible assets.

As already stated, Axel Springer has experienced the biggest changes measured
by the amounts of intangible assets and goodwill as the amount of goodwill is 30
times bigger and the amount of total intangible assets is more than 20 times bigger
in 2014 than in 2005. In turn, the increase in total assets comparing the years 2005
and 2014 has been significantly lower as the amount of total assets has only
doubled. Alma Media and Sanoma has experienced the lowest growth in the amount
of total assets but still, Alma Media’s intangible assets has increased the third most
after Axel Springer and Schibsted. Sanoma has seen the lowest growths both in
total assets and total intangible assets but the total intangible assets to total assets
ratio is still the highest for Sanoma among the examined companies. In general, the
share of intangibles has increased significantly in the media companies’ balance
sheets. Figure 3. presents Alma Media’s goodwill and identifiable intangible assets
amounts in the balance sheet between 2005 and 2014.

93
80
70
60
50
40
30
20
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
goodwill identifiable intangible assets

Figure 3. Alma Media’s goodwill and identifiable intangible assets amounts
(million EUR) in the balance sheet between 2005 and 2014

The average goodwill to total intangible assets ratio has been the lowest, only 53,4
percent, for Axel Springer but Axel Springer is the only examined company, which
has also seen an upward development for this ratio. Other companies average ratios
have been significantly bigger, between 70 and 79 percent but Alma Media’s,
Sanoma’s and Schibsted’s ratios have seen a downward trend and for Modern
Times Group it cannot be said whether the development is upward or downward.

There are also big differences in the average total intangible assets to total assets
ratios. For Sanoma, this ratio is 63,8 percent but for Alma, it is only a little bit more
than 30 percent. Sanoma has the significantly highest intangible assets to total
assets ratio even though the increase in total intangible assets in the balance sheet
has not been radical during the examined period. This is obviously due to the
different natures of the businesses as some of the companies have been more
focused on the traditional print media and others on digital media. The development
has also been very different for Alma and Sanoma even though they are both
Finnish media companies. One reason for Axel Springer’s significantly bigger
increases in intangible assets and goodwill in the balance sheet may be the big size
and also the nature of the business. Big companies usually can survive longer
94
despite the big changes as it is not that dependent on one or two sources of
revenues.

Table 24. Summary of the examined companies’ balance sheet information in
2005-2014
Alma Sanoma Schibsted Modern Axel
Media Times Springer
Group
Goodwill to total 71,3 78,2 72,0 79,0 53,4
intangible assets, %,
average
Total intangible assets 27,9 63,8 51,5 35,0 31,7
to total assets, %,
average
The percentage 268,8 31,6 611,9 87,2 2904,2
increase in goodwill
comparing the years
2005 and 2014
The percentage 310,3 37,8 751,1 96,8 2205,8
increase in total
intangible assets
comparing the years
2005 and 2014
The percentage 5,1 1,5 125,3 44,3 112,8
increase in total
assets comparing the
years 2005 and 2014

In the center of this study are business acquisitions and their impacts on the
acquirer’s assets and liabilities. There are differences between the examined
companies in the amounts of business acquisitions and their importance. Axel
Springer and Modern Times Group has been growing aggressively through
95
business acquisitions as the average total acquisition cost to net sales ratios have
been more than 10 percent. Alma Media’s ratio has been 5,1 percent, Sanoma’s
ratio 7,4 percent and Schibsted’s ratio 9,8 percent. The differences are significant
as for example, Axel Springer’s ratio is three times bigger than Alma Media’s
corresponding ratio.

One of the objectives of the introduction of IFRS 3 has been to reduce the amount
of goodwill and to encourage companies to recognize more identifiable intangible
assets instead of accounting them into goodwill. Sanoma and Axel Springer has had
the smallest goodwill to total acquisition cost ratios. Alma Media is also very close
to them with a 61,0 percent share. The trend has also been decreasing since 2005
in the case of Alma media, Schibsted and Axel Springer. Modern Times Group has
the highest average goodwill to total acquisition cost ratio, which is even 85,6
percent and the direction of this ratio is not clear due to the lack of related
information in 2009-2011 and in 2013. Sanoma’s goodwill to total acquisition cost
ratio has been lower than other companies’ ratios but there is no clear evidence of
whether this ratio has been decreasing since 2005. For Axel Springer, which also
has the low goodwill to total acquisition cost ratio, the development has clearly been
downward.

Table 25. Summary of the impact of business combinations on the examined
companies’ assets and liabilities in 2005-2014, averages
Alma Sanoma Schibsted Modern Axel
Media Times Springer
Group
Total acquisition 5,1 7,4 9,8 10,3 14,4
cost to net sales, %
Goodwill to total 61,0 59,4 72,7 85,6 59,2
acquisition cost, %
Identifiable 63,6 52,1 60,2 39,5 68,7
intangible assets to
total assets, %

96

It may be, that due to the fact that some intangible assets cannot be identified
separately from goodwill and these unidentified assets, e.g. human capital, are
important intangible assets arising on the business acquisitions, there are big
variations in the amount of the acquisition cost allocated to goodwill. In some years,
a major part of the acquisition cost is allocated to goodwill and does not necessarily
depend on the reluctance of the companies to recognise intangible assets
separately from goodwill, as Carvalho et al. (2012) argue, but rather the recognition
criteria under IAS 38.

Alma Media’s, Schibsted’s and Axel Springer’s ratios show that the development of
shares of goodwill allocated to the total acquisition cost has been consistent with
the objective of IFRS 3 to reduce the amount of allocated goodwill. This
development is really significant despite the fact that the amount of goodwill in every
company’s balance sheet has grown significantly. There was neither a sign of an
increase in the amount of acquisition cost has been allocated into goodwill for any
examined companies and this is a good sign from the perspective of IFRS and
financial statement users. This should also give more useful information to financial
statement users about the acquired intangible assets. As an example, figure 4.
presents Axel Springer’s shares of the acquisition costs allocated to goodwill
between 2006 and 2014.

100 %
90 %
80 %
70 %
60 %
50 %
40 %
30 %
20 %
10 %
0 %
2006 2007 2008 2009 2010 2011 2012 2013 2014
goodwill

97
Figure 4. Axel Springer’s shares of the acquisition costs allocated to goodwill

between 2006 and 2014

Even though the general direction of the development of goodwill to total acquisition
cost ratios is good, it is still interesting to examine the possible reasons for the
differences between these ratios among the examined companies. One way to
search for the answer to these differences is to compare the definitions of goodwill.
Comparing to the disclosures related to goodwill, Modern Times Group has defined
goodwill in terms of synergies, workforce, new customer and customer relationships
and other intangible assets which cannot be accounted separately, Sanoma in
terms of synergies and workforce, Axel Springer in terms of workforce and
synergies, Alma Media in terms of synergies and Schibsted in terms of synergies,
workforce and non-contractual customer agreements. The definitions are really
similar to each other and it seems that they do not explain the big differences in the
goodwill to total intangible asset ratios. One interesting fact is that Axel Springer’s
goodwill disclosures were very concise as there were only two different definitions
of goodwill despite the big size of the company.

In general, the examined companies seem to consider goodwill as an excess or a
residuum but it does not mean that goodwill is unclear. Giuliani and Brännström
(2011) find that “Core goodwill” is the largest category and “Intangibles” is the
smallest. They also conclude that despite the stimulation of IFRS 3, the top-down
approach for goodwill is still predominant and goodwill continues to be seen as a
residuum. Human capital is one of the most significant acquired intangible assets in
connection with the business acquisitions in this study and it has to be accounted
into goodwill because it does not meet the asset recognition criteria. Sahut et al.
(2011) argue that investors benefit more identifiable intangible assets which are
recognised separately from goodwill. This also relates to the prudent recognition
criteria under IAS 38 because the acquirers do not have a choice to recognise some
intangible assets separately and the composition of goodwill more depends on the
current accounting standards.

98
Identifiable intangible assets recognised in business combinations has also been
pretty consistent among the companies examined in this study. Brännström et al.
(2009) finds inconsistency related to disclosed intangible asset labels in their
sample but this may be due to the different industries as the nature of the business
may differs a lot between the business sectors. At least in the sample of this study,
which included only media companies, the disclosed labels have been similar to
each other. Hence, this may indicate that there is no need for the standardised
disclosure labels.

One of the concerns related to IFRS 3 is the management discretion because of the
introduction of impairment regime and fair value accounting for intangible assets.
Goodwill and other impairments have been investigated carefully and the evidence
is clear for all the examined companies: They all have made more impairments in
those years when the net sales have decreased significantly the next year. This
means that impairments are a clear sign of the worsened economic performance of
the company or the negative changes in the economic environment. Lhaopadchan
(2010) states that despite the management seem to behave opportunistically when
making impairments, it does not necessarily mislead financial statement users. This
study finds that goodwill impairments do reflect the changes in the company’s
economy and despite the increased management discretion, impairments are still
useful. It is also good to notice that even though management has discretion they
do not always use it opportunistically. The problem may be that many studies which
criticise management discretion do not have empirical evidence and the claims are
rather based on the possibility to use that discretion which has been given to the
management. In this study, impairments do not convey misleading information to
the stakeholders and other financial statement users but rather improves the quality
of the financial statement information.

The last, fair value adjustments related to acquired intangible assets were examined
and the findings are clear: intangible assets account for 100 percent of the fair value
adjustments with few exceptions. The introduced fair value accounting reveals new
intangible assets which has been invisible capital in the acquiree’s balance sheet.
The management discretion also relates to this topic very closely and accounting
99
standard setters has to consider whether to allow the management recognise these
assets which also gives useful information to the financial statement users or to
prohibit this policy.

100
4 Summary and conclusions

4.1 Answers to the research questions

The main research question of this study was that how the adoption of IFRS 3 has
affected the accounting treatment for identifiable intangible assets and goodwill
acquired in a business combination in the examined media companies in 2005-
2014. In addition, this study investigated, whether there are differences by applying
IFRS 3 between the companies during the examined period. One of the main
objectives of IFRS 3 is to make goodwill a clearer asset (Brännström et al. 2009,
63). This also means that companies have been encouraged to recognise more
intangibles separately from goodwill which is the biggest intangible asset for most
of the companies and also for the examined media companies in this study.

During the examined period, the amount of goodwill and other intangible assets
increased significantly in the sample companies’ balance sheets and for example,
in the case of Axel Springer they were even 30 times bigger at the end of the
examined period in 2014 than at the beginning in 2005. One reason for this was the
business acquisition-driven growth. In this study it could be seen that one of the
main and clearest impacts of IFRS 3 was that the amount of goodwill decreased in
the examined companies’ balance sheet, with the exception of one company. The
same trend could be seen in the purchase price allocations as the share of
acquisition cost allocated to goodwill also decreased;; there were only one company
for which it was difficult to say the direction of the development due to the lack of
relevant acquisition information.

Relating to the purchase price allocations, IFRS 3 requires to recognise acquired
assets and liabilities at their fair values. This makes it possible to recognise
intangible assets that have not been recognised in the acquiree’s balance sheet
before the acquisition. The share of intangible assets of fair value adjustments was
almost in every business acquisition 100 percent, which perfectly reflects how much
unrecognised intangible assets companies’ can have and usually they are not
101
recognised because they do not meet the recognition criteria. Further, for most of
the examined companies, trademarks and customer relationships which were not
recognised in the acquiree’s balance sheet before the acquisition, were one of the
most important intangible assets arising from the business acquisitions. In some
cases, these unrecognised assets covered a major part of the total assets
recognised in connection with the acquisition. As the pooling of interests method
only combined the balance sheets of two companies, the purchase method
introduced by IFRS 3 allows new intangible assets to be recognised, such as
internally generated intangibles, which cannot be identified under the recognition
criteria without an acquisition.

The most significant change in the accounting treatment for intangible assets arising
from business combinations has been the introduction of goodwill impairment test
instead of systematic amortisation. During the examined period, it can be clearly
seen that due to this, investors and other financial statements users can better
anticipate the future development of revenues and other future prospects. In
general, it seems that IFRS 3 has reached some of its objectives at least in the
media sector. IFRS 3 also requires companies to perform a qualitative description
of the factors that make the recognised goodwill, e.g. the expected synergies, and
it seems that these descriptions are really similar to each other despite the size and
the domicile of the company. In general, disclosures related to intangibles and
goodwill are consistent among the examined companies and in most of the
definitions, goodwill has been defined in terms of synergies, human capital and/or
non-contractual customer agreements.

The first sub question concentrated on the value relevance of financial statements
and intangible assets and whether the adoption of IFRS 3 impacted positively on
the value relevance of financial statements and intangible assets. The value
relevance of goodwill impairments was also investigated as impairment test for
goodwill introduced by IFRS 3 is one of the most significant reforms of the whole
IFRS accounting. The observation of this study indicated that goodwill impairments
better reflect the companies’ future development and is a good signal from the
management to all the stakeholders.
102

Due to the prudent intangible asset recognition criteria, some intangible assets,
such as internally generated intangible assets, cannot be recognised in the balance
sheet but these assets can be recognised in connection with the business
acquisitions. This means, that more intangible assets can be recognised in the
balance sheet but at the same time it may distort the comparison between
companies. Few studies (e.g. Chalmers et al. 2008;; Oliveira et al. 2010) find that
this impacted negatively on the value relevance as certain intangible assets cannot
be recognised and due to this they were accounted to be a part of goodwill. Sahut
et al. (2011) also argue that identified intangibles capitalised in the balance sheet
provide more value-relevant information for shareholders under IFRS than
unidentified intangibles transferred into goodwill. However, the harmonisation of the
accounting treatment for intangible assets seem to have positive and desirable
results as the development was almost similar among the examined companies.

The second sub question examined the requirements set by IFRS related to the
accounting treatment for business combinations and goodwill and other intangible
assets arising on these acquisitions. Accounting treatment for business
combinations is regulated under IFRS 3. The purchase method introduced by IFRS
3 replaced the pooling of interests method and requires the assets and liabilities
recognised in a business combination to be recognised at their fair values. IFRS 3
also introduced the impairment regime instead of systematic amortisation for
goodwill and intangible assets with indefinite useful lives and this reform significantly
increased the amount of goodwill in the companies’ balance sheet. In addition to
IFRS 3, IAS 36 is applied to goodwill and intangible assets acquired in business
combinations. IAS 36 sets the requirements for goodwill and intangible assets
impairment tests and the objective of this standard is to ensure that assets are not
carried at more than their recoverable amount. IAS 38, in turn, regulates the
accounting treatment for intangible assets and is also applied to acquired intangible
assets except purchased goodwill. IAS 38 includes the definition and recognition
criteria for intangibles.

103
The third sub question examined both advantages and challenges of IFRS 3 related
to the accounting treatment for goodwill and other identifiable intangibles. One of
the biggest concerns related to IFRS 3 is the increased management discretion
related to the goodwill impairment instead of systematic amortisation and fair value
accounting. This study finds clear evidence that goodwill and other impairments
reflect the economic performance of the company, which is also the objective of the
impairment regime. This result was unambiguous and supports the academic
literature’s discussion about the usefulness of impairments. The advantages of
impairments are that it reduces the information asymmetry between financial
statement users and management and gives investors useful information about the
future prospects of the company.

The lack of active markets and reliable market prices for certain intangible assets
has also been one of the challenges under IFRS and the increased management
discretion related to the valuation of these intangible assets for which the market
prices are not available. Academic researchers disagree about the usefulness of
fair values and the improved information quality related to the use of fair value-based
numbers. However, it is a significant reform and the advocates of fair value
accounting provide evidence that companies can more reliable convey information
about the acquired assets as they are carried at their fair values. It also makes more
intangible assets visible due to the possibility to record also internally generated
intangible assets. As a summary, the biggest challenge for IFRS 3 is the fact that it
gives management more discretion but there is still clear evidence that the
increased discretion improves the accounting treatment for business combinations
and acquired intangible assets so this challenge is also the biggest advantage of
IFRS 3.

4.2 Contribution of the study

This study participates in the academic discussion related to accounting treatment
for intangible assets that has been going on for several decades and more detailed,
the accounting treatment for intangible assets arising from business combinations.
This study has investigated comprehensively the impacts of IFRS 3 on the
104
accounting treatment for acquired intangible assets and goodwill in the media
companies and the results indicate that the introduction of IFRS 3 has had desirable
results.

This study provides a comprehensive and detailed descriptive analysis of how the
examined media companies have applied IFRS 3 and tries to find both differences
and similarities between the companies. The observations made in this study can
provide useful information also to the accounting standard setters to assess the
effects of IFRS 3 and help to plan to make possible revisions both for IFRS 3 and
for the other relevant standards. The examined companies include different
companies and these companies have only two things in common: accounting
standards applied and the industry. Thus, this study encourages researchers and
accounting standard setters to pay more attention to the industry and not only to the
country where the company is operating (e.g. AbuGhazaleh et al. 2012;; Chalmers
et al. 2012;; Gjerde et al. 2008;; Hamberg & Beisland 2014;; Sahut et al. 2011). Even
though this study provides findings only from the media sector, the significant
observation is that the country and the size of the company do not seem affect on
how IFRS 3 is applied.

The findings of this study provide strong evidence that IFRS 3 has had positive
effects on the accounting treatment for acquired intangible assets;; the amount of
goodwill has increased significantly due to the active participation by the examined
companies in business acquisitions but the percentage share of goodwill has
decreased in the balance sheet and also in the purchase price allocations less
amount of the purchase price has allocated to goodwill. This same trend can be
noticed despite the size and the domicile of the company. It also seems that
accounting harmosation regarding acquired intangible assets has improved.

This study reveals that there are big amounts of intangible assets in the companies’
balance sheet that cannot be recognised under the present intangible asset
recognisition criteria. A study made by Gjerde et al. (2008) also shows that due to
the fact that more intangibles can be recognised under the fair value accounting,
the value-relevance increases. However, it is interesting that these assets can be
105
only recognised when they are acquired in a business combination, and if they do
not meet the recognition criteria and cannot be accounted separately, they are
accounted into goodwill. Studies by Wyatt (2005) and Matolcsy and Wyatt (2006)
argue that limiting management discretion to record intangible assets reduce rather
than improve the quality of balance sheet and too prudent recognition criteria may
deteriorate the usefulness and quality of financial statement information. These
studies have their point because this study also finds that companies actively
searching for growth through business combinations may have more assets
recognised in their balance sheets than other companies which may have large
amounts of invisible assets in their balance sheets.

The researchers and accounting standard setters disagree about whether the
present intangible asset recognition criteria are too prudent or not. Those who state
that the recognition criteria should be prudent enough (e.g. Dahmash et al. 2009;;
Hoegh-Krohn & Knivsflå 2000) argue that prudence is vital to prevent accounting
manipulations and without it assets may not be valued reliably. Kanodia et al. (2004)
and Hoegh-Krohn & Knivsflå (2000) also highlight that the prudent recognition
criteria guarantee the value reliability.

However, those who criticise the current recognition criteria to be too prudent also
provide evidence of the advantages related to increased management discretion
because it helps to provide more useful economic information about the company
to its stakeholders and reduces information asymmetry between the management
and stakeholders and increase rather than decrease the value reliability. Choi et al.
(2000) and Godfrey and Koh (2001) also argue that managerial discretion is
beneficial in the accounting treatment of intangibles because it reduces biases and
errors related to the financial reporting. This study provides some observations to
this discussion: First, it is clear that the present recognition criteria distort the
comparability between companies that are actively making business acquisitions
and companies that are not. Second, all the intangible assets are not recognised in
the balance sheet and due to this, investors may do false and unprofitable
investment decisions. This leads to the situation where the resources are not
allocated to the most profitable investments and the financial statement information
106
is not relevant. In accordance with the results of this study, Su and Wells (2014)
also state that there is no empirical evidence supporting the current regulatory
distinction between acquired generated identifiable intangible assets, which is the
core of the whole discussion.

This study provides evidence that the introduction of IFRS 3 has had positive
impacts on the accounting treatment for business combinations and acquired
intangible assets in accordance with the results of AbuGhazaleh et al. 2011,
Chalmers et al. 2012, Chalmers et al. 2011 and Li et al. 2011 who find that goodwill
impairments better reflect the economic value of goodwill and the changes in the
economic environment. However, the impacts of this standard also raise relevant
questions whether the recognition criteria are appropriate or not. IFRS 3 and the
related fair value accounting have undoubtedly highlighted the weaknesses of the
current recognition criteria under IAS 38 and this indicates that something has to be
done to make financial statements more comparable and harmonised. The
introduction of IFRS 3 has improved the harmonisation of accounting for acquired
intangible assets but it has also revealed that something has to be done and one
solution could be the allowance of the recognition of internally generated intangible
assets in the balance sheet. The concerns about the increased management
discretion and accounting manipulations in the case of goodwill impairment regime
do not seem to be true but on the contrary, impairments seem to convey information
about future cash flows and the economic performance of the company. Then, why
would the management discretion not be useful also when allowing the recognition
of internally generated intangibles? Lapointe-Antunes et al. (2009) highlight the
importance of auditing when using fair value-based numbers so this could be one
very considerable solution to ensure the appropriate valuation of assets.

The last observation is that many studies (e.g. Forbes 2007;; Shalev 2009) claim
that goodwill is recognised in such high amounts. However, they do not tell the
development or the reasons for this. In this study, it can be stated that the amount
of purchase price allocated to goodwill has been decreasing as is the share of
goodwill from total assets. The studies by Brännström et al. (2009) and Brännström
and Giuliani (2011), in turn, claim that goodwill is difficult to interpret and remains
107
“the black box” and IFRS 3 has not managed to make it any clearer or more
understandable. First of all, this study provides evidence of the decreasing share of
acquisition cost allocated to goodwill, which is in accordance with the objectives of
IFRS 3. When examining the disclosures related to definition of goodwill, in many
cases it is defined in terms of intangible assets that cannot be recognised
separately, such as human capital, due to the recognition criteria under IAS 38. It
seems that IFRS 3 has met its objectives and but the requirements under IAS 38
should be reformed instead.
4.3 Further research and limitations

This study examines the impacts of IFRS accounting, especially IFRS 3, on the
accounting treatment for intangible assets arising on business combinations in the
media sector. Due to the limited time, five companies were observed from four
different countries. The limited time causes that the findings of this study cannot be
generalised to regard all the media companies or all the industries. For further
research, it could be interesting to compare different industries, how they apply IFRS
3 and examine whether the findings are similar to the findings of this study along
the different industries.

This study has been conducted by using a descriptive analysis and due to this, the
study focuses on balance sheet and income statement numbers more than the
factors behind the changes in the numbers or the relations of these factors. This
study answers the question how IFRS 3 has affected on the accounting treatment
for acquired intangible assets. Information available on financial statements is not
always comprehensive concerning e.g. goodwill impairments or factors behind fair
value assessment and what happens in the economy in general may provide more
valuable information about the factors behind impairments and changes in the
financial statement numbers.

As the core interest in this study are intangible assets arising from business
combinations and the study concentrates only IFRS accounting, the future research
108
could also take into account US GAAP standards as they include similar standards
to IFRS 3, IAS 36 and IAS 38. There are also more studies made about accounting
treatment for business combinations in the USA than in Europe. There are not so
many studies made to compare IFRS and US GAAP in the field of business
acquisitions and how they have been applied.

This study examines only the accounting treatment for acquired intangible assets
and under IAS 38 the recognition criteria is always met for acquired assets and
some assets, e.g. internally generated intangible assets can be only recognised in
connection with business combinations. This distorts the balance sheet information
between companies which actively participate in business acquisitions and those
which do not. This could be also an interesting topic for the researchers to examine
as the increasing amount of companies are searching for growth through business
combinations.

The cultural differences may affect strongly on the accounting treatment and when
trying to harmonise accounting standards these cultural differences also affect on
the application of accounting standards. In this study, cultural differences and their
impacts on the accounting standard application were not examined. The culture may
affect strongly on how companies interpret accounting standards and it is important
to understand the culture of the country when planning the harmonisation the
accounting standards. More than 100 countries in the world have adopted IFRS and
this causes challenges for accounting standard setters to plan standards which
really make financial statements more comparable and harmonise the accounting
treatment. Anyway, the direction towards more comparable and more harmonised
financial statements standards seems to be right but there are still a lot of things to
be done.

109
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EMPIRICAL RESEARCH DATA

Alma Media (2015) Annual report 2014. Helsinki, Alma Media Corporation.








125


Axel Springer (2015) Axel Springer annual report 2014. Berlin, Axel Springer SE.










Modern Times Group (2015) Modern Times Group annual report 2014. Stockholm,
Modern Timed Group MTG AB.



126







Sanoma (2015) Sanoma annual report 2014. Helsinki, Sanoma Corporation.






127




Schibsted (2015) Schibsted annual report 2014. Oslo, Schibsted ASA.










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2 Accounting for intangible assets ................................................................ 10

3 Accounting treatment for acquired intangible assets in the media

4 Summary and conclusions ....................................................................... 100

References ......................................................................................................... 109

1.1 Background and motivation

Business Investments in Intangible and Tangible Capital,

1.2 Literature review

important strategic resources. The specific nature of intangible resources allows to

1.3 Research questions, objectives and delimitations

Financial statements of parent companies are prepared according to local

1.4 Research methodology and data

1.5 Structure of the study

2 Accounting for intangible assets

more prudent recognition requirements related to the recognition of identifiable

2.3 International Financial Reporting Standards

2.3.1 Intangible assets

empirical perspective because it consists of many different elements and

2.3.2 Recognition criteria of intangible assets

The cost of the The power to

The power to

2.3.3 Initial recognition, measurement subsequent to acquisition and amortisation

2.3.4 Accounting for business combinations

2.4.1 Accounting treatment for goodwill under IFRS 3

2.4.2 Fair value accounting of acquired intangible assets

Lhaopadchan (2010) examine whether since the introduction of fair value

As a conclusion the fair value accounting and fair-­value-­based accounting numbers

2.4.3 Disclosures related to intangible assets and goodwill

2.5.1 Accounting conservatism

Conservatism accounting means choosing accounting methods and estimates that

According to Lev et al. (2005, 981) no accounting system applied can be

et al. (2008) provide evidence on the positive economic consequences of the

3 Accounting treatment for acquired intangible assets in the

3.1 Research data and description of research process

Total 256,1 1511,2 2033,6 3016,5 5557,7

3.2 Alma Media

Goodwill to 75,6 73,0 -­ 69,0 33,3 78,4 -­ 54,5 -­ 43,3

Total 0,1 2,4 -­ 0,6 0,3 1,5 -­ 16,7 -­ 1,1

Carrying 0,0 0,0 -­ 0,0 0,0 0,0 -­ 8,8 -­ -­

Sanoma’s business acquisitions

3.4 Schibsted Media Group

of Editions, goodwill arising on the acquisition is “attributable to non-­contractual

3.5 Modern Times Group

Identifiable 249 420 46 780 -­ 17 -­ 28 284 90

3.6 Axel Springer Group

Share of -­ 100, 86,6 100, 94,2 77,4 100, 100, 100, -­

3.7 The main findings and discussion

goodwill identifiable intangible assets

Figure 4. Axel Springer’s shares of the acquisition costs allocated to goodwill

4 Summary and conclusions

4.1 Answers to the research questions

4.2 Contribution of the study

4.3 Further research and limitations

Basu, S. (1997) The conservatism principle and the asymmetric timeliness of

Holthausen, R. W. & Watts, R. L. (2001) The relevance of the value-­relevance

KPMG (2010) Intangible Assets and Goodwill in the context of Business

38, No. 3, pp. 209-­213.

Lönnqvist, A. (2007) Intellectual capital and productivity: identification and

Matolcsy, Z. & Wyatt, A. (2006) Capitalized intangibles and financial analysts.

Saarnivaara V.S. (2007) Aineeton pääoma strategisena kilpailuvalttina. Helsinki,

Skinner, D. J. (2008) Accounting for intangibles -­ a critical review of policy

Su, W. H. & Wells, P. (2014) The association of identifiable intangible assets

Wyatt, A. (2008) What financial and non-­financial Information on Intangibles is

Sanoma (2009) Sanoma annual report 2008. Helsinki, Sanoma Corporation.

As a conclusion the fair value accounting and fair-value-based accounting numbers

Goodwill to 75,6 73,0 - 69,0 33,3 78,4 - 54,5 - 43,3

Total 0,1 2,4 - 0,6 0,3 1,5 - 16,7 - 1,1

Carrying 0,0 0,0 - 0,0 0,0 0,0 - 8,8 - -

of Editions, goodwill arising on the acquisition is “attributable to non-contractual

Identifiable 249 420 46 780 - 17 - 28 284 90

Share of - 100, 86,6 100, 94,2 77,4 100, 100, 100, -

Holthausen, R. W. & Watts, R. L. (2001) The relevance of the value-relevance

38, No. 3, pp. 209-213.

Skinner, D. J. (2008) Accounting for intangibles - a critical review of policy

Wyatt, A. (2008) What financial and non-financial Information on Intangibles is