Implications of Changes in GAAP for Business Combinations (and Goodwill) on Accounting and Finance Research

Abstract

The accounting standards related to mergers and acquisitions (M&A) have changed drastically in the past twenty years. In spite of significant debate and arguments that the proposed accounting changes might hinder optimal decision-making, the use of business combinations as a means of growth by international companies has escalated. In this paper, we review the extant academic literature on the subject, as well as the changes in the standards on accounting for M&A. We also express some concerns about the ways the standard changes impact accounting data, and the need for extra care in addressing these changes in academic research. The changes addressed include the accounting for goodwill and bargain purchases, contingent consideration (such as earnouts), step acquisitions, and in-process R&D. We present pros and cons for many of these changes, and offer some alternatives and recommendations for improvement as we move forward. In addition, we provide an analysis of the number of M&A transactions relevant in various accounting standard-setting periods and by M&A topic (consideration used, earnouts, step acquisitions, and non-controlling interests).