Recognition of Supplier and Customer Relationships in Business Combination: A quantitative study of American acquisitions

Abstract

While insights from business relationship literature indicate that relationships with suppliers and customers are key value drivers in many companies, there is little insight as to how their value is reflected in firms’ financial statements. Relationships can only be recognized as intangible assets when they are acquired, which is usually done through a business combination. To provide a better understanding of business relationships and how they are accounted for, we investigate possible determinants that could affect the probability of relationships being recognized in business combinations. Through logistic regression, we examine a sample of 516 business combinations by publicly traded American companies during the period 2001-2011. We find that the probability of allocation to these relationships is higher when the target firm operates in a high-tech industry, and that its pre-acquisition profit margin has a positive impact on the probability. Additionally, it is found that the likelihood of allocation to business relationships is greater after the implementation of a revised version of SFAS 141, and when the acquirer and target firm operates in different industries. We further find an interchange between allocation to supplier and customer relationships, and allocation to other identifiable intangible assets. However, no indication is found that the post, through its interchange with goodwill is associated with accounting for certain incentives. The findings are of relevance to both relationship literature, financial accounting literature and standard setters as they are some of the first quantitative evidence of when customer and supplier relationships are recognized in business combinations.