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The Value-Relevance of Financial Statement Recognition versus Note Disclosure: Evidence from Goodwill Accounting

  • Khaled Al Jifri
  • David Citron
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    The relative significance of financial statement recognition and note disclosure is an important issue for accounting regulators, preparers and auditors. While standard-setters prioritise financial recognition over disclosure, the empirical evidence on the value-relevance of note disclosures is mixed. This is partly due to the severe methodological problems inherent in comparing the two modes of presentation. This paper examines this issue in a new context by exploiting the UK regulatory environment where old pre-FRS 10 goodwill continues to be disclosed in the notes to the accounts at the same time as new post-FRS 10 goodwill is capitalised. It thus uses a within-firm research method to examine the relative significance of the two goodwill amounts. The analysis is based on a sample of 243 non-financial firms containing amounts of both recognised and disclosed goodwill in their 2002 financial statements. Both variables are significantly associated with share price. In addition, for firms engaging in R&D, there is no significant difference between the contributions of disclosed and recognised goodwill in explaining market value, a result consistent with the markets efficiently incorporating goodwill information irrespective of where it appears in the annual report.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09638180802324351
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    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 18 (2009)
    Issue (Month): 1 ()
    Pages: 123-140

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    Handle: RePEc:taf:euract:v:18:y:2009:i:1:p:123-140
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