European Accounting Review Vol. 18, No. 1, 123-140, 2009 The Value-Relevance of Financial Statement Recognition versus Note Disclosure: Evidence from Goodwill Accounting KHALED AL JIFRI* and DAVID CITRON ** *CBE - Accounting Department, United Arab Emirates University, Al-Ain, United Arab Emirates and ** Cass Business School, City University, London, UK ABSTRACT 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. 1. Introduction This paper examines whether the market values goodwill disclosed only in the notes to the accounts equivalently to goodwill recognised in the balance sheet. It exploits the unique UK regulatory framework in which accounting for goodwill Correspondence Address: David Citron, Cass Business School, City University, 106 Bunhill Row, London EC1Y 8TZ, UK. E-mail: d.b.citron@city.ac.uk 0963-8180 Print/1468-4497 Online/09/010123-18 ? 2009 European Accounting Association DOI: 10.1080/09638180802324351 Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA.
124 K. Al Jifri & D. Citron moved from note disclosure to balance sheet recognition. This context enables the study to contribute to the recognition vs. disclosure debate without encounter- ing the self-selection bias introduced when firms have a choice about the report- ing method or the influence of contemporaneous events if recognised and disclosed amounts are observed at different points in time. This issue is important for a number of reasons. Firstly, the question as to whether share prices reflect amounts disclosed in the notes and those recognised in the financial statements similarly, as would be expected in efficient markets, is of interest to regulators, accounts preparers and auditors. In this connection, reg- ulators appear to prioritise recognition over disclosure. Thus the UK Accounting Standards Board's conceptual framework favours recognition when it states: '. . . disclosure of information in the notes is not a substitute for recognition and does not correct or justify any misrepresentation in or omission from the primary financial statements' (ASB, 1999, para. 7.5). Similarly, in its conceptual frame- work the IASB (International Accounting Standards Board)