Copyright is owned by the Author of the thesis. Permission is given for a copy to be downloaded by an individual for the purpose of research and private study only. The thesis may not be reproduced elsewhere without the permission of the Author. AN EXAMINATION OF THE ACCOUNTING TREATMENT AND VALUE RELEVANCE OF INTANGIBLE ASSETS IN PUBLICLY LISTED NEW ZEALAND COMPANIES A thesis presented in partial fulfilment of the requirements for the degree of MASTERS OF BUSINESS STUDIES IN ACCOUNTING at Massey University Albany, New Zealand CAROL JEAN HART 2002 Acknowledgements I wish to acknowledge and express my gratitude to all those who have contributed to the completion of this thesis. My thanks go primarily to my supervisor, Professor Steven Cahan, for his guidance and constructive comments. I would like to give special thanks to Professor Michael Bradbury for his advice and encouragement and for his willingness to read drafts and offer suggestions. I would also like to thank Mr Bruce Bennett and Mrs Elizabeth Rainsbury, who in their management of the work environment, gave support for the writing of this thesis. Finally I would like to thank my husband, Peter, for his continual support, encouragement and proofreading skills. Table of Contents Acknowledgements Table of Contents List of Tables Abstract Chapter One - Introduction 1.1 - The New Zealand Regulatory Environment 1.2 - Aim of the Research 1.3 - Data and Limitations 1.4 -Terminology 1.5 - Thesis Outline Chapter Two - Background 2.1 - Types of Intangible Assets 2.2 - Regulatory Interest in Intangible Assets 2.3 - General interest in Intangible Assets Chapter Three - Literature Review and Objectives of Current Research 3.1 - Capitalisation of Intangible Assets 3.2 - Development of the First Objective 3.3 - Capitalisation and Level of Debt 3.4 - Development of the Second Objective ii Page ii vii x 1 1 3 3 4 5 6 6 7 11 16 16 20 20 22 3.5 - The Value Relevance of Intangible Assets 22 3.6 - Information Asymmetry, Size and Ownership Structure 27 3.7 - Development of the Third Objective 31 3.8 - Contribution of the Research 32 Chapter Four - Descriptive Overview of Intangible Capitalisation 33 4.1 - Introduction 33 4.2 - Methodology for Objective One 34 4.2.1 - Objective One 34 4.2.2 - Descriptive Information 34 4.2.3 - Contributions to Value 35 4.2.4 - Intangible Assets Capitalised at Cost or Value 36 4.2.5 - Amortisation 36 4.3 - The Overview 36 4.4 - Descriptive Statistics 38 4.5 - Company Size and Sector 39 4.6 - Intangible Asset Capitalisation 41 4.6.1 - Capitalisation by Company Size and Industry Sector 41 4.6.2 - Distinguishing Other Intangible Assets from Goodwill 44 4.7 - The Contribution to Value 46 4.7.1. - Contribution to Total Intangible Asset Value made by Goodwill and Other Intangible Assets 46 4. 7 .2 - The Contribution to Value on the Balance Sheet made by Intangible Asset Capitalisation 4.8 - Intangible Assets Capitalised at Cost or Value 4.9 - Amortisation Details for Companies 4.10 - Summary of Chapter Findings iii 47 50 52 53 Chapter Five - Capitalised Intangible Assets and Debt 55 5.1 - Introduction 55 5.2 - Methodology for Objective Two 56 5.2.1 - Objective Two 56 5.2.2 - Debt-to-equity levels 56 5.2.3 - Contribution to total asset levels 57 5.2.4 - Effect of capitalisation on debt-to-equity percentages 57 5.2.5 - Amortisation Practices 57 5.3 - Levels of Debt-to-Equity 58 5.4 - Intangible Asset Capitalisation Levels and Debt 61 5.5 - The Effect of Capitalisation on Debt-to-Equity 63 5.6 - Amortisation Practices 65 5.7 - Summary of Chapter Findings 65 Chapter Six - Capitalised Intangible Assets and Market Value 67 6.1 - Introduction 67 6.2 - Methodology for Objective Three (Part 1) 67 6.2.1 - Objective Three 67 6.2.2 - Market-to-book ratios 67 6.2.3 - Market Value and Other Factors 68 6.3 - Market and Book Values of Equity 70 6.4 - Factors and Capitalising Companies 73 6.5 - Summary of Chapter Findings 75 Chapter Seven - Modelling for Market Value 77 7.1 - Introduction 77 7.2 - Methodology for Objective Three (Part 2) 78 7.2.1 - Objective Three 78 iv 7.2.2 -Value Relevance Hypotheses 78 7.2.3 - Regression Modelling for Value Relevance 79 7.2.4 - The Data for Regression Modelling 82 7.2.5 - Companies Differentiated by Type of Capitalisation 82 7.3 - Reporting the Results for the Value Relevance Models 83 7.4- Results for all 109 Companies 84 7.5 - Separating Capitalising and Non-Capitalising Companies 86 7.6 - Companies Differentiated by Type of Capitalisation 87 7 .6.1 - Variations 87 7.6.2 - Companies Capitalising Goodwill 88 7.6.3 - Companies Capitalising Other Intangible Assets 90 7.6.4 - Companies with Both Goodwill and OIAs Present 91 7.6.5 - Companies Capitalising Goodwill or OIAs (but not both) 93 7.7 - Summary of Chapter Findings 94 Chapter Eight - Factors and Intangible Asset Capitalisation 96 8.1 - Introduction 96 8.2 - Methodology for Objective Three (Part 3) 96 8.2.1 - Objective Three 96 8.2.2 - Modelling taking factors into consideration 97 8.3 - Reporting Results 98 8.4 - Outcomes from the Full Interactive Modelling 98 8.5 - Ownership Diversity 99 8.6 - Industry Capitalisation Levels 103 8.7 - Company Size 105 8.8 - Debt Level 107 8.9 - Summary of Chapter Findings 110 v Chapter Nine - Concluding Remarks 9.1 - Introduction 9.2 - Summary of the Study and Main Conclusions 9.2.1 - Objectives of the Study 9.2.2 - Conclusions 9.3 - Contribution to the Literature 9.4 - Limitations of the Study 9.5 - Suggestions for Future Research References Appendix vi 112 112 112 112 113 114 115 116 117 128 List of Tables TABLE 4.1: DESCRIPTIVE STATISTICS FOR COMPANY DATA TABLE 4.2: COMPANIES BY SECTOR AND SIZE TABLE 4.3: INTANGIBLE ASSET CAPITALISATION Page 39 40 41 TABLE 4.4: COMPANIES CAPITALISING INTANGIBLE ASSETS (BY SECTOR AND SIZE) 42 TABLE 4.5: PERCENTAGE OF COMPANIES WITH INTANGIBLE ASSETS 43 TABLE 4.6: GOODWILL AND OTHER INTANGIBLE ASSETS BY COMPANY SIZE 44 TABLE 4.7: GOODWILL AND OTHER INTANGIBLE ASSETS BY COMPANY SECTOR 45 TABLE 4.8: PERCENTAGE VALUE OF TOTAL CAPITALISED INTANGIBLE ASSETS REPRESENTED BY GOODWILL 46 TABLE 4.9: PERCENTAGE VALUE OF TOTAL CAPITALISED INTANGIBLE ASSETS REPRESENTED BY INTANGIBLES OTHER THAN GOODWILL 46 TABLE 4.10: CAPITALISED INTANGIBLE ASSETS AS A PERCENTAGE OF TOTAL AND NON CURRENT ASSETS 47 TABLE 4.11 : CAPITALISED GOODWILL AND OTHER INTANGIBLE ASSETS AS A PERCENTAGE OF TOTAL AND NON CURRENT ASSETS 48 TABLE 4.12: DESCRIPTIVE STATISTICS FOR INTANGIBLE ASSET PERCENTAGES 49 TABLE 4.13: MEAN AND MEDIAN FOR PERCENTAGE CONTRIBUTION TO TOTAL AND NONCURRENT ASSET VALUE MADE BY OTHER INTANGIBLE ASSETS 51 TABLE 4.14: GOODWILL AMORTISATION 52 TABLE 4.15: AMORTISATION OF OTHER INTANGIBLE ASSETS 53 TABLE 5.1 : DESCRIPTIVE STATISTICS FOR DEBT-TO-EQUITY PERCENTAGES 58 TABLE 5.2: PERCENTAGES OF TOTAL DEBT-TO-EQUITY 59 TABLE 5.3: PERCENTAGES OF LONG TERM DEBT TO EQUITY 59 TABLE 5.4: PERCENTAGES OF TOTAL DEBT-TO-EQUITY FOR COMPANIES CAPITALISING DIFFERENT TYPES OF INTANGIBLE ASSETS 60 TABLE 5.5: NUMBERS OF COMPANIES AT DIFFERENT LEVELS OF INTANGIBLE ASSET CAPITALISATION AND DEBT 61 TABLE 5.6: NUMBERS OF COMPANIES AT DIFFERENT LEVELS AND TYPES OF INTANGIBLE ASSET CAPITALISATION AND DEBT 62 vii TABLE 5.7: NUMBERS OF COMPANIES AT DIFFERENT LEVELS OF CAPITALISATION AND DEBT FOR INTANGIBLES CAPITALISED AT VALUE 63 TABLE 5.8: TOTAL DEBT-TO-EQUITY (EXCLUDING CAPITALISED INTANGIBLES) 64 TABLE 5.9: DESCRIPTIVE STATISTICS FOR TOTAL DEBT-TO-EQUITY PERCENTAGES 65 TABLE 6.1: DESCRIPTIVE STATISTICS FOR MARKET-TO-BOOK VALUE OF EQUITY 71 TABLE 6.2: NUMBER OF COMPANIES AT DIFFERENT LEVELS OF MARKET-TO­ BOOK EQUITY RATIOS 72 TABLE 6.3: NUMBER OF COMPANIES AT DIFFERENT LEVELS OF INTANGIBLE ASSET CAPITALISATION AND MARKET-TO-BOOK EQUITY RATIOS 72 TABLE 6.4: LEVELS OF MARKET VALUE FOR 81 CAPITALISING COMPANIES 73 TABLE 6.5: MARKET-TO-BOOK EQUITY RATIOS FOR 81 FACTORED COMPANIES 74 TABLE 7.1.1: MARKET VALUE REGRESSION MODELS FOR ALL COMPANIES 84 TABLE 7 .1.2: INCREMENTAL EXPLANATORY POWER OF VARIABLES FOR ALL COMPANIES 85 TABLE 7.2.1: MARKET VALUE REGRESSION MODELS FOR CAPITALISING AND NON-CAPITALISING COMPANIES 86 TABLE 7.2.2: INCREMENTAL EXPLANATORY POWER OF VARIABLES FOR COMPANIES CAPITALISING INTANGIBLE ASSETS 87 TABLE 7.3.1: MARKET VALUE REGRESSIONS FOR COMPANIES CAPITALISING GOODWILL TABLE 7.3.2: INCREMENTAL EXPLANATORY POWER OF VARIABLES FOR COMPANIES CAPITALISING GOODWILL TABLE 7.4.1: COMPANIES CAPITALISING OIAS TABLE 7.4.2: INCREMENTAL EXPLANATORY POWER OF VARIABLES FOR COMPANIES CAPITALISING OIAS TABLE 7.5.1: MARKET VALUE REGRESSION MODELS FOR COMPANIES WITH 88 89 90 91 BOTH GOODWILL AND OIAS 92 TABLE 7.5.2: INCREMENTAL EXPLANATORY POWER OF VARIABLES FOR COMPANIES CAPITALISING BOTH GOODWILL AND OIAS 92 TABLE 7.6.1: MARKET VALUE REGRESSION MODELS FOR COMPANIES CAPITALISING EITHER GOODWILL OR OIAS (BUT NOT BOTH) 93 TABLE 7.6.2: INCREMENTAL EXPLANATORY POWER OF VARIABLES FOR COMPANIES CAPITALISING ONLY GOODWILL 94 viii TABLE 7.6.3: INCREMENTAL EXPLANATORY POWER OF VARIABLES FOR COMPANIES CAPITALISING ONLY OIAS 94 TABLE 8.1: SIGNIFICANCE OF VARIABLES FROM INTERACTIVE FACTOR MODELS (REPORTED USING P-VALUES OF THE VARIABLE COEFFICIENTS IN THE REGRESSION MODEL) 99 TABLE 8.2.1: MARKET VALUE REGRESSION MODELS USING OWNERSHIP DIVERSITY AS A FACTOR 100 TABLE 8.2.2: MARKET VALUE REGRESSION MODELS USING OWNERSHIP AS A FACTOR 101 TABLE 8.3.1: MARKET VALUE REGRESSION MODELS USING INDUSTRY SECTOR AS A FACTOR 103 TABLE 8.3.2: MARKET VALUE REGRESSION MODELS USING INDUSTRY SECTOR AS A FACTOR 104 TABLE 8.4.1: MARKET VALUE REGRESSION MODELS USING SIZE AS A FACTOR 106 TABLE 8.4.2: MARKET VALUE REGRESSION MODELS USING SIZE AS A FACTOR 107 TABLE 8.5.1: MARKET VALUE REGRESSION MODELS USING DEBT LEVEL AS A FACTOR 108 TABLE 8.5.2: MARKET VALUE REGRESSION MODELS USING DEBT LEVEL AS A FACTOR 109 TABLE 8.6: NUMBER OF COMPANIES AT DIFFERENT LEVELS OF INTANGIBLE ASSET CAPIT ALISA Tl ON AND DEBT APPENDIX TABLE I: LEVELS OF MARKET VALUE FOR 73 FACTORED CAPITALISING COMPANIES APPENDIX TABLE II : MARKET-TO-BOOK EQUITY RATIOS FOR 73 FACTORED COMPANIES ix 110 128 128 Abstract With little current public information on intangible asset capitalisation in the New Zealand environment, this study uses companies listed on the New Zealand Stock Exchange to determine current practice. The purpose of the study is to provide a springboard for further research into the intangible area as well as providing an understanding of how New Zealand companies contend with intangible assets, in the light of the controversy that has surrounded the introduction of the exposure draft, ED-87 Accounting for Intangible Assets. The study finds that, apart from goodwill, there are a variety of other intangible assets capitalised by New Zealand listed companies and that the majority of these assets are valued at cost. Capitalisation extends across most industry sectors and company size, although a higher proportion of larger than smaller companies capitalise intangible assets. The contribution to asset value made by capitalisation is quite high for some companies, with intangible assets other than goodwill contributing a greater proportion to asset value than goodwill. Although capitalising intangibles reduces the discrepancy between market and book values of equity, capitalising companies still have higher market-to-book ratios than non-capitalising companies, indicating that the market recognises further uncapitalised intangible value. Whilst companies with higher debt levels have a greater tendency to be capitalising companies, there is no evidence to suggest that companies are capitalising simply because of leverage factors. However, with amortisation periods tending to longer rather than shorter time spans (with many companies not amortising at all), companies may well be using amortisation practices to maintain higher asset levels on the balance sheet. x The research supports overseas evidence for the value relevance of capitalised intangible assets and also finds that corporate ownership diversity and size can be influential in that value relevance. xi