Fair Value Accounting Case Study

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The aim of this chapter is to present an introduction to the thesis. This study develops empirical research to explore the relationship between executive compensation structure and fair value accounting in the context of business combination. Particularly, it examines the effect of CEO compensation including both earning based and equity based compensation structure on post-acquisition fair value measurement on merger and acquisition activities completed in U.S. context, after the application of the Statement of Financial Accounting Standards “SFAS” 142, Goodwill and Other Intangibles Assets, in July 2001, using the amounts recognized as goodwill as a proxy of the accuracy of fair value accounting. Specifically, the researcher examines the…show more content…
The first perspective assesses the relationship by considering how Fair value accounting impacts executives’ compensation. This viewpoint focuses on efficient compensation contracting and how it is affected by applying fair value accounting and assesses the existence of a relation between the equity-based board compensation (option based board compensation and stock-based board compensation) and fair value accounting. Many scholars study this relation from the perspective of contacting theory, Hao (2010) studies the influence of the changes fair value on executive compensation after the implementation of the new accounting standards. They find that Change in Fair Value (CFV), an item in the income statement, tends to increase executive pay levels. Zhou et al. (2010) find that Chief Executive Officers (CEOs) and chairmen are responsible for gains or losses from short- term investment property, but their salaries are sensitive to CFV. Xu and Zheng (2010) document that profits from CFV (PCFV) have a positive effect on executive compensation and that the incentive effects are significantly higher than for other earnings items. Zhang et al. (2011) find that PCFV entered in the income statement and directly…show more content…
Previous studies have found that higher bonus intensity leads to a higher allocation of goodwill from Mergers and Acquisitions (Shalev et al. 2013 and Detzen and Zulch 2012). Statement of Financial Accounting Standards “SFAS” 142, Goodwill and Other Intangibles Assets, requires that goodwill is not amortized on a straight-line basis but subject to an annual impairment test. This means that recognizing more goodwill will reduce acquirer’s amortization expenses and increase a company’s earnings. If executives tend to manage earnings, they may be willing to recognize a large amount of goodwill to avoid amortization charges associated with other tangible assets that lead to increasing the earnings, and respectively increasing their bonus. It can be said that this study focuses on the second perspective as it investigates the impact of executive compensation structure specifically the CEO compensation on fair value measurement for acquired firms in U.S. context using the Purchase Consideration allocation setting. Hence, the research problem can be pinpointed as measuring the impact of CEO compensation structure on fair value measurement for US merged and acquired firms using the Purchase Consideration allocation process. After the application of SFAS 142,

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