Tax Incentives and Fair Value Accounting for Intangible Assets

Using hand-collected data from purchase price allocations, I examine whether tax incentives influence the publicly reported fair values of acquired intangible assets. Post-acquisition accounting requires that the purchase price be allocated among the net assets of the acquired business based on their fair values with any remainder reported as goodwill. The tax planning strategies of US multinationals often employ related-party intangibles transactions to direct related-party royalty payments from higher tax locations to a lower tax country. Such tax planning activities may affect the purchase price allocation to intangibles and goodwill for financial reporting purposes because contradictory valuations make it harder to defend a tax position. I find that firms with foreign operations or higher average foreign tax rates allocate less of the purchase price to goodwill, consistent with allocating more to intangible assets. This result suggests that tax incentives may mitigate the financial reporting incentives to overstate goodwill found in prior research. I also find evidence consistent with tax incentives resulting in understated values of technology intangibles relative to marketing intangibles.